Problem $4-31$ CVP Applications; Contribution Margin Ratio: Degree of Operating Leverage $[$LO$3,$ LO$5,$ LO$6,$ LO$8]$

Dog Dandy distributes a dog collar made of wooden beads that sells for $$40$ per unit. Variable expenses are $$20$ per unit, and fixed expenses total $$158,400$ per year. Its operating results for last year were as follows:

Sales $ $528,000$

Variable expenses $264,000$

Contribution margin $264,000$

Fixed expenses $158,400$

Operating income $ $105,600$

Required:

Answer each of the following independent questions based on the original data.

$1.$ What is the product$$s CM ratio?

$2.$ Use the CM ratio to determine the break$-$even point in dollar sales.

$3.$ Assume this year$$s unit sales and total sales decrease by $$53,200.$ If the fixed expenses do not change, how much will operating income decrease?

$4.$ What is the degree of operating leverage based on last year$$s sales? $($Round your answer to $1$ decimal place.$)$

$5.$ Assume the this year$$s unit sales will decrease by $20\%$ next year. Using the degree of operating leverage from last year, what percentage decrease in operating income will the company incur this year?

$6-$a$.$ The sales manager is convinced that a $10\%$ reduction in the selling price, combined with a $$23,200$ increase in advertising, would increase this year$$s unit sales by $40\%.$ If the sales manager is right, what would be this year$$s operating income if his ideas are implemented?

$6-$b$.$ Do you recommend implementing the sales manager$$s suggestions?

multiple choice

Yes

No