The Excel worksheet form that appears below is to be used to recreate Exhibit 2-9. Download the workbook from Connect, where you will also receive instructions about how to use this worksheet.

You should proceed to the requirements below only after completing your worksheet.
Required:
1. Check your worksheet by changing the fixed expenses to $270,000. If your worksheet is operating properly, the degree of operating leverage should be 10. If you do not get this answer, find the errors in your worksheet and correct them. How much is the margin of safety percentage?
Did it change? Why or why not?
2. Enter the following data from a different company into your worksheet:
Unit sales . . . . . . . . . . . . . . . . . . . . . . . 10,000 units
Selling price per unit . . . . . . . . . . . . . . $120 per unit
Variable expenses per unit . . . . . . . . . . $72 per unit
Fixed expenses . . . . . . . . . . . . . . . . . . . . . $420,000
What is the margin of safety percentage? What is the degree of operating leverage?
3. Using the degree of operating leverage and without changing anything in your worksheet, calculate the percentage change in net operating income if unit sales increase by 15%.
4. Confirm the calculations you made in requirement 3 above by increasing the unit sales in your worksheet by 15%. What is the new net operating income and by what percentage did it increase?
5. Thad Morgan, a motorcycle enthusiast, has been exploring the possibility of re-launching the Western Hombre brand of cycle that was popular in the 1930s. The retro-look cycle would be sold for $10,000 and at that price, Thad estimates 600 units would be sold each year. The variable cost to produce and sell the cycles would be $7,500 per unit. The annual fixed cost would be $1,200,000.
a. Using your worksheet, what would be the break-even unit sales, the margin of safety in dollars, and the degree of operating leverage?
b. Thad is worried about the selling price. Rumors are circulating that other retro brands of cycles may be revived. If so, the selling price for the Western Hombre would have to be reduced to $9,000 to compete effectively. In that event, Thad would also reduce fixed expenses by $300,000 by reducing advertising expenses, but he still hopes to sell 600 units per year. Do you think this is a good plan? Explain. Also, explain the degree of operating leverage that appears on your worksheet.

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1 Chapter 3: Applying Excel 3 Data 4 Unit sales 5 Selling price per unit 6 Variable expenses per unit 7 Fixed expenses 20,000 units $60 per unit S45 per unit 240,000 9 Enter a formula into each of the cells marked with a ? below 10 Review Problem: CVP Relationships Problems cove Relaa ? per unit 13 Selling price per unit 14 Variable expenses per unit 15 Contribution margin per unit 16 17 CM ratio 18 Variable expense ratio 19 20 Compute the break-even 21 Break-even in unit sales 22 Break-even in dollar sales 23 24 Compute the margin of safety 25 Margin of safety in dollars 26 Margin of safety percentage 27 28 Compute the degree of operating leverage 29 Sales 0 Variable expenses 31 Contribution margin 32 Fixed expenses 33 Net operating income 34 35 Degree of operating leverage 36 per unit 2 per unit ? units Chapter 3 Form Filled in Chapter 3 Form