eBook Learning Objective 5Exercise 9-27

CVP; operating leverage; income statement

Racine Tire Co. manufactures tires for all-terrain vehicles. The tires sell for $60, and variable cost per tire is $30; monthly fixed cost is $450,000.

Use the contribution margin ratio to calculate break even point sales.

a. What is the break-even point in units?

tires per month

What is the break-even point in sales dollars?

$ per month

b. If Ronnie Rice, the company's CEO, wants the business to earn a pre-tax profit of 25 percent of revenues, how many tires must be sold each month?

units

c. If the company is currently selling 20,000 tires monthly, what is the degree of operating leverage?

d. If the company can increase sales volume by 15 percent above the current level, what will be the increase in net income?

$

What will be the new net income?

$

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Solution

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Prove your calculations with an income statement.

Racine Tire Co.

Income Statement

For the Month XXX

Current

Proposed

• Contribution Margin
• Fixed Costs
• Net Income
• Sales
• Variable Expense

Correct 6 of Item 2

$ Correct 7 of Item 2

$ Correct 8 of Item 2

• Less: Contribution Margin
• Less: Fixed Costs
• Less: Net Income
• Less: Sales
• Less: Variable Expenses

Correct 9 of Item 2

Correct 10 of Item 2

Correct 11 of Item 2

• Contribution Margin
• Fixed Costs
• Net Income
• Sales
• Variable Expense

Correct 12 of Item 2

$ Correct 13 of Item 2

$ Correct 14 of Item 2

• Less: Contribution Margin
• Less: Fixed Costs
• Less: Net Income
• Less: Sales
• Less: Variable Expenses

Correct 15 of Item 2

Correct 16 of Item 2

Correct 17 of Item 2

• Contribution Margin
• Fixed Costs
• Net Income
• Net Loss
• Variable Expenses

Correct 18 of Item 2

$ Correct 19 of Item 2

$ Correct 20 of I