Textbook Problem

Contribution Margin Ratio, Break-Even Sales, Operating Leverage

Elgart Company produces plastic mailboxes. The projected income statement for the coming year follows:

Required:

1. 1. Compute the contribution margin ratio for the mailboxes.
2. 2. How much revenue must Elgart earn in order to break even?
3. 3. What is the effect on the contribution margin ratio if the unit selling price and unit variable cost each increase by 15%?
4. 4. CONCEPTUAL CONNECTION Suppose that management has decided to give a 4% commission on all sales. The projected income statement does not reflect this commission. Recompute the contribution margin ratio, assuming that the commission will be paid. What effect does this have on the break-even point?
5. 5. CONCEPTUAL CONNECTION If the commission is paid as described in Requirement 4, management expects sales revenues to increase by $80,000. How will this affect operating leverage? Is it a sound decision to implement the commission? Support your answer with appropriate computations.