Comprehensive CVP problem (Learning Objectives 1, 2, 5)
Fanfare sells flags with team logos. Fanfare has fixed expenses of $678,600 per year plus variable expenses of $4.20 per flag. Of this variable expense, 60% relates to the cost of goods sold, while 40% relates to operating expenses. Each flag sells for $12.
Requirements 1. Use the income statement equation approach to compute the number of flags that Fanfare must sell each year to break even.
2. Use the contribution margin ratio shortcut formula to compute the dollar sales Fanfare needs in order to earn $32,500 in operating income.
3. Prepare Fanfare’s contribution margin income statement for the year ended December 31, 2008, for sales of 100,000 flags.
4. What is December’s margin of safety (in dollars)? What is the operating leverage factor at this level of sales?
5. By what percentage will operating income change if January’s sales volume is 5% higher? Prove your answer.