Chapter 4: Research and Application

1. The income statements differ in a few ways, first of all on page 33 the common size income statement is used and on page 50 it is not broken down the same way. Also on page 50 does not break down the costs as both variable and fixed. The income statement on page 33 also shows additional information, changes in line items from the years 2003 and 2004.
The selling, general and administrative expenses appear to be reclassified as variable selling cost in the income statement on page 33.

2. The reason that these expenses are included in computation of contribution margin in the income statement on page 33 is because they are variable expenses; they will change when the production amount also changes. The cost of sales includes expenses that are mostly variable.

Breakeven Point | Year | 2003 | 2004 | Cost of Sales | € 1,049 | € 929 | Variable selling cost | 114 | 104 | Total Variable Cost | € 1,163 | € 1,033 | Total Fixed Cost | € 531 | € 488 | Breakeven Point | € 1,694 | € 1,521 |
3.

The numbers are not the same because the total fixed cost is not the same for both.

Desired sales to reach an income of 300 | | General and Admin Expenses | € 436 | Cost of Sales | 929 | Variable selling cost | 104 | Total Direct cost and operating cost | € 1,469 | Desired Income | 300 | Sales Required for income of 300 | € 1,769 |
4.

5. The margin of safety for both years comes out to be the same. Margin of Safety | Years | 2003 | 2004 | Total Sales | € 1,859 | € 1,686 | Less: Breakeven Sales | € 1,694 | € 1,521 | Margin of Safety | € 165 | € 165 |

6. Degree of Operating Leverage = -6.20/-9.30 = 66.67% (% Change in Operating Income / % Change in Sales)

If sales were 6% higher | | | Years | 2004 | 2004 (+6%) | Sales | € 1,686 | € 1,787 | Cost of Sales | 929 | 985 | Gross Operating Income | € 757 | € 802 | Variable Selling Cost | 104 | 110 | Contribution Margin | € 653 | € 692 | General and Administrative Expenses | 436 | 436 | Operating Income | € 217 | € 256 | % of Income from operation to sales | 12.87% | 14.33% | Operating income increase by e39 % increase = 1.46%.

7. Scenario B has the highest operating income. Year / Scenario | 2004 |