Voltar Company manufactures and sells a specialized cordless telephone for high electromagnetic radiation environments. The company’s contribution format income statement for the most recent year is given below:

Management is anxious to increase the company’s profit and has asked for an analysis of a number of items.
Required:
1. Compute the company’s CM ratio and variable expense ratio.
2. Compute the company’s break-even point in both unit sales and dollar sales. Use the equation method.
3. Assume that sales increase by $400,000 next year. If cost behavior patterns remain unchanged, by how much will the company’s net operating income increase? Use the CM ratio to compute your answer.
4. Refer to the original data. Assume that next year management wants the company to earn a profit of at least $90,000. How many units will have to be sold to earn this target profit?
5. Refer to the original data. Compute the company’s margin of safety in both dollar and percentage form.
6.

a. Compute the company’s degree of operating leverage at the present level of sales.

b. Assume that through a more intense effort by the sales staff, the company’s sales increase by 8%
next year. By what percentage would you expect net operating income to increase? Use the degree of operating leverage to obtain your answer.

c. Verify your answer to

(b) by preparing a new contribution format income statement showing an 8%
increase in sales.
7. Refer to the original data. In an effort to increase sales and profits, management is considering the use of a higher-quality speaker. The higher-quality speaker would increase variable costs by $3 per unit, but management could eliminate one quality inspector who is paid a salary of $30,000 per year. The sales manager estimates that the higher-quality speaker would increase annual sales by at least 20%.

a. Assuming that changes are made as described above, prepare a projected contribution format income statement for next year. Show data on a total, per unit, and percentage basis.

b. Compute the company’s new break-even point in both unit sales and dollar sales. Use the formula method.

c. Would you recommend that the changes be made?

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Total Per Unit Percent of Sales Sales (20,000 units).... Variable expenses Contribution margin Fixed expenses. $1,200,000 $60. 100% 900,000 45 ? % 300,000 $15 ? % 240,000 Net operating Income $ 60,000