Question :

Head-First Company plans to sell 5,080 bicycle helmets at $68 each in the upcoming year. Unit variable cost is $45 (includes direct materials, variable factory overhead, direct labor, and variable selling expense). Total fixed cost equals $49,500 (Adds fixed factory overhead and administrative expense and fixed selling). Break-even units equal 2,152.

Required:

1. Evaluate the margin of safety in terms of the number of units then evaluate the margin of safety in terms of sales revenue.

Impact of Increased Sales on Operating Income Using the Degree of Operating Leverage

Now suppose Head-First Company had planned to sell 5,000 bicycle helmets at $76 each in the coming year. Unit variable cost is $47 (includes direct materials, direct labor, variable factory overhead, and variable selling expense). Net fixed cost equals $49,500 (includes fixed factory overhead and fixed selling and administrative expense). Operating income at 5,000 units sold is $95,500. The degree of operating leverage is 1.5. Now Head-First expects to increase sales by 10% next year.

1. Evaluate the percent change in operating income expected. %_____

2. Evaluate the operating income expected next year using the percent change in operating income determine in Requirement 1

Units Sold to Break Even, Unit Manufacturing Cost, Unit Variable Cost, Units to Earn Target Income

Finally, Prachi Company sells and produces disposable foil baking pans to retailers for $2.40 per pan. The variable cost per pan is as follows:

Direct materials                $0.21

Direct labor         0.59

Variable factory overhead           0.65

Variable selling expense               0.14

Fixed manufacturing costs totals $181,479 per year. Administrative cost all fixed totals $24,747.

Required:

1. Evaluate the number of pans that must be sold for Prachi to break even.

_____ pans

2. Conceptual Connection: Evaluate the unit variable cost? Determine the unit variable manufacturing cost?

Unit variable cost             $____

Unit variable manufacturing cost              $______

How many units must be sold for Prachi to earn operating income of $5,751?

_______ pans

4. How much sales revenue must Prachi have to earn operating income of $5,751? $_________