Problem $7-54$ Contribution Margin, Break$-$Even Units, Break$-$Even Sales, Margin of Safety,

Degree of Operating Leverage

Aldovar Company produces a variety of chemicals. One division makes reagents for laboratories. The division's

projected income statement for the coming year is:

Description Amount

Sales $(203,000$ units @ $$70)$ $$14,210,000$

Total variable cost $8,120,000$

Contribution margin $$6,090,000$

Total fixed cost $4,945,500$

Operating income $$1,144,500$

Required:

$1.$ Compute the contribution margin per unit, and calculate the break$-$even point in units. Calculate the contribution

margin ratio and use it to calculate the break$-$even sales revenue. $($Note: Round contribution margin ratio to four

significant digits, and round the break$-$even sales revenue to the nearest dollar.$)$

Description Answer

Unit contribution margin

Break$-$even point in units

Contribution margin ratio

Break$-$even sales revenue

$2$ The divisional manager has decided to increase the advertising budget by $$250,000.$ This will increase sales

revenues by $$1$ million. By how much will operating income increase or decrease as a result of this action?

Use your answers from part $1$ to determine the amount.

$3.$ Suppose sales revenues exceed the estimated amount on the income statement by $$1,500,000.$ Without

preparing a new income statement, by how much are profits underestimated? Use your answers from

part $1$ to determine the amount.

$4.$ Compute the margin of safety based on the original income statement. Round your answer to the nearest dollar.

$5$A Compute the degree of operating leverage based on the original income statement. Round your answer to two

decimal places.

$5$B If sales revenues are $8\%$ greater than expected, what is the percentage increase in operating income? Round

your answer to four decimal places before converting to a percentage. For example, $0\mathrm{.}88349$ would be rounded

to $0\mathrm{.}8835$ and entered as $88\mathrm{.}35\%$