Basic CVP Concepts Katayama Company produces a variety of products. One division makes neoprene wetsuits. The division’s projected income statement for the coming year is as follows: Sales (65,000 units) $15,600,000 Less: Variable expenses 8,736,000 Contribution margin $6,864,000 Less: Fixed expenses 4,012,000 Operating income $2,852,000 2. The divisional manager has decided to increase the advertising budget by $140,000 and cut the average selling price to $200. These actions will increase sales revenues by $1 million. Will this improve the division's financial situation? 3. Suppose sales revenues exceed the estimated amount on the income statement by $612,000. Without preparing a new income statement, determine by how much profits are underestimated. $ 4. How many units must be sold to earn an after-tax profit of $1.254 million? Assume a tax rate of 34 percent. Round your answer to the nearest whole unit. units 5. Compute the margin of safety in dollars based on the given income statement. Round your answer to the nearest dollar. $ 6. Compute the operating leverage based on the given income statement. Round your answer to three decimal places. Use the rounded answer in the subsequent computation. 7. If sales revenues are 20 percent greater than expected, what is the percentage increase in profits? Round the percentage to two decimal places. %
Variance Analysis
In layman's terms, variance analysis is an analysis of a difference between planned and actual behavior. Variance analysis is mainly used by the companies to maintain a control over a business. After analyzing differences, companies find the reasons for the variance so that the necessary steps should be taken to correct that variance.
Standard Costing
The standard cost system is the expected cost per unit product manufactured and it helps in estimating the deviations and controlling them as well as fixing the selling price of the product. For example, it helps to plan the cost for the coming year on the various expenses.
Basic CVP Concepts
Katayama Company produces a variety of products. One division makes neoprene wetsuits. The division’s
| Sales (65,000 units) | $15,600,000 |
| Less: Variable expenses | 8,736,000 |
| Contribution margin | $6,864,000 |
| Less: Fixed expenses | 4,012,000 |
| Operating income | $2,852,000 |
2. The divisional manager has decided to increase the advertising budget by $140,000 and cut the average selling price to $200. These actions will increase sales revenues by $1 million. Will this improve the division's financial situation?
3. Suppose sales revenues exceed the estimated amount on the income statement by $612,000. Without preparing a new income statement, determine by how much profits are underestimated.
$
4. How many units must be sold to earn an after-tax profit of $1.254 million? Assume a tax rate of 34 percent. Round your answer to the nearest whole unit.
units
5. Compute the margin of safety in dollars based on the given income statement. Round your answer to the nearest dollar.
$
6. Compute the operating leverage based on the given income statement. Round your answer to three decimal places. Use the rounded answer in the subsequent computation.
7. If sales revenues are 20 percent greater than expected, what is the percentage increase in profits? Round the percentage to two decimal places.
%
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