Fast Spirit Calendars imprints calendars with college names. The company has fixed expenses of $1,095,000 each month plus variable expenses of $4.00per carton of calendars. Of the variable expense, 71%is cost of goods sold, while the remaining 29% relates to variable operating expenses. The company sells each carton of calendars for $12.00. Requirement:
1. Compute the number of cartons of calendars that Fast Spirit Calendars must sell each month to breakeven. 
2. Compute the dollar amount of monthly sales Fast Spirit Calendars needs in order to earn $312,000 in operating income.
3. Prepare the company's contribution margin income statement for June for sales of 455,000 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 11% higher?
Original volume (cartons)Add: Increase in volumeNew volume (cartons)Multiplied by: Unit contribution marginNew total contribution marginLess: Fixed expensesNew operating incomevs. Operating income before change in volumeIncrease in operating incomePercentage change

Answer and Explanation:

1. The computation of the number of cartons is shown below:-

Operating income  = Sales - Variable expenses - Fixed expense

The break-even sales = Fixed expenses ÷ (Selling price - Variable cost)

= $1,095,000 ÷ (12 - 4)

= $136,875

2. The computation of the dollar amount of monthly sales is shown below:-

Contribution margin ratio = Contribution ÷ Sales  

= $8 ÷ 12

= 66.6666%

Target sales in dollars  = (Fixed expenses + Operating income) ÷ Contribution margin ratio

= ($1,095,000 + $312,000) ÷ 66.6666%

= $2,110,500

3. The preparation of the company's contribution margin income statement for June is shown below:-

Particulars                                           Amount

Sales (455,000 × $12)                      $5,460,000

Less: Variable cost of goods sold

(4 × 71% × 455,000)                          -$,1292,200

Gross contribution margin                $4,167,800

Less: Variable operating expenses -$527,800

(4 × 29% × 455,000)

Net contribution margin                    $3,640,000

Less: Fixed expenses                      -$1,095,000

Net operating income                       $2,545,000

4. The computation of June's margin of safety and operating leverage factor is shown below:-

Margin of safety (in dollars)  = Total sales - Break-even sales

= $5,460,000 - ($12 × 136,875)

= $3,817,500

Operating leverage factor  = Contribution margin ÷ Net operating income

= $3,640,000 ÷ $2,545,000

= 1.430

4. The computation of percentage will operating income is shown below:-

If volume rises by 11%, then operating income increase by

= 11% × 1.430

= 15.73%

Particulars                                         Amount

Original volume of cartons              $455,000

Add: Increase in volume                   $50,050  ($455,000 × 11%)

New volume of cartons                     $505,050

Unit contribution margin                     $8

New total contribution margin       $4,040,400

($505,050 × $8)

Less: Fixed expense                      ($1,095,000)

New operating income                    $2,945,400

Operating income before

change in volume                           $2,545,000

Increase in operating income        $400,400

Percentage change                         15.73%

the answer is "b.the increased supply will create a surplus. "

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