Cabrera Company produces a variety of chemicals. One division makes reagents for laboratories. The division's projected income statement for the coming year is:
Sales (384,000 units @ $50)...........................$19,200,000
Less: Variable expenses..................................13,440,000
Contribution margin.......................................5,760,000
Less: Fixed expenses......................................3,000,000
Operating income.........................................$2,760,000
Required:
1. Determine the Contribution margin per unit, and the break-even point in units. Calculate the Contribution margin ratio and the break-even sales revenue.
2. The divisional manager has decided to increase the advertising budget by $300,000. This will increase sales revenues by $3 million. By how much will operating income increase or decrease as a result of this action?
3. Suppose sales revenues exceed the estimated amount on the income statement by $945,000. Without preparing a new income statement, by how much are profits underestimated?
4. Why can we take the shortcut of simply focusing on the increased sales revenue to determine increased profitability?
5. Determine the margin of safety based on the original income statement.
6. Calculate the degree of operating leverage based on the original income statement. If sales revenues are 20 percent greater than expected, what is the percentage increase in operating income? Round operating leverage to two decimal places.