Vast Spirit imprints calendars with college and university names. The company has fixed expenses of $1,045,000 each month plus variable expenses of $3.90 per carton of calendars. Of the variable expense, 66% is cost of goods sold, while the remaining 34% relates to variable operating expenses. Vast Spirit sells each carton of calendars for $11.50.
Requirements
1. Use the income statement equation approach to compute the number of cartons of calendars that Vast Spirit must sell each month to break even.
2. Use the contribution margin ratio shortcut formula to compute the dollar amount of monthly sales Vast Spirit needs in order to earn $275,000 in operating income (round the contribution margin ratio to two decimal places).
3. Prepare Vast Spirit’s contribution margin income statement for June for sales of 460,000 cartons of calendars.
4. What is June’s margin of safety (in dollars)? What is the operating leverage factor at this level of sales?
5. By what percentage will operating income change if July’s sales volume is 10% higher? Prove your answer.