Reference no: EM132586990

Tyrene Products manufactures recreational equipment. One of the company's products, a skateboard, sells for $37.5. The skateboards are manufactured in an antiquated plant that relies heavily on direct labor workers. Thus, variable costs are high, totaling $22.5 per skateboard.

Over the past year the company sold 40,000 skateboards, with the following operating results:

Sales (40,000 skateboards) 1,500,000

Less variable expenses 900,000

Contribution Margin 600,000

Less fixed expenses 480,000

Net operating income 120,000

Management is anxious to maintain and perhaps even improve its present level of income from the skateboards/

Required:

Question 1. Compute (a) the CM ratio and the break-even point in skateboards and (b) the degree of operating leverage at last year's level of sales.

Question 2. Due to an increase in labor rates, the company estimates that variable costs will increase by $3 per skateboard next year. If this change takes place and the selling price per skateboard remains constant at $37.50, what will be the new CM ratio and the new break-even point in skatboards?

Question 3. Refer to the data in (2) above. If the expected change in variable costs takes place, how many skateboards will have to be sold next year to earn the same net operating income ($120,000) as last year?