During the most recent fiscal period, Cherokee Company had sales of $80,000. Variable costs are 20% of sales and fixed costs amounted to $48,000 for the year.
Calculate the following in Excel:
a. Contribution margin ratio
b. Operating leverage
c. Break-even sales in dollars
d. Using operating leverage, calculate the operating profit if sales increase by 20% next year.
Tutor Changed status to publish February 18, 2019
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Following are the calculations as required above.
| Formulae | Result | Formulae | Result(Amount) | |
| Sales | 100% | $80,000 | ||
| Variabe cost | Given | 20% | Sales*Variable cost% | $16,000 |
| Contriution margin ratio/ Contribution | (Sales-variable cost)/Sales | 80% | Sales-Variable cost | $64,000 |
| Fixed cost | Given | $48,000 | ||
| Operating profit ratio/ operating profit | (Contribution-Fixed cost)/Sales | 20% | (Contribution-Fixed cost) | $16,000 |
| Operating leverage | Contribution/Operting profit | 4 | ||
| Break even sales in dollar | Fixed cost/Contribution% | $60,000 |
Operating leverage is 4, that means 10% change in sales will increase the operating profit by 40% (i.e 4*10%).
If sales is increased by 20% then the operating profit will be increased by 80% (i.e 4*20%).
Operating profit after 20% increase in sales = $16,000+ ($16,000*80%) or $16,000*180%
=$28,800
Anonymous Changed status to publish January 10, 2019
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