Cost Behavior and Cost-Volume-Profit Analysis Study Guide Solutions Fill-in-the-Blank Equations

Chapter 19
Cost Behavior and Cost-Volume-Profit Analysis

Study Guide Solutions
Fill-in-the-Blank Equations
1. Variable cost per unit
2. Fixed cost
3. Variable costs
4. Contribution margin
5. Change in sales dollars
6. Unit contribution margin
7. Change in sales units
8. Break-even sales (units)
9. Contribution margin ratio
10. Fixed costs
11. Contribution margin ratio
12. Income from operations
13. Percent change in income from operations
14. Sales
15. Break-even sales (dollars)
16. Sales (units)
1
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2 Chapter 19
Exercises
1. Determine if each of the following would be considered a fixed cost, variable cost, or
mixed cost.
a. The company’s lawyer charges a base fee of $400 per month plus $20 for each
hour of legal service provided.
Mixed cost
b. The property taxes for the year are 5% of the value of the building.
Fixed cost
c. The direct materials used for packaging finished goods cost $2 per finished good.
Variable cost
2. Determine if each line plotted in the graph below, which represent total cost, is an
example of a fixed cost, variable cost, or mixed cost.
1800
1600
1400
1200
1000 Variable
800 Mixed
600 Fixed
400
200
0
0 200 400 600 800 1000
3. Determine if each situation describes a variable cost, fixed cost, or mixed cost.
a. As the number of units produced increases, the cost per unit remains the same.
Variable cost
b. Each month, the company pays $1,200 for interest.
Fixed cost
c. The bank charges $50 per month to maintain a checking account and an
additional $1.50 for each check if the company writes more than 60 checks.
Mixed cost
Cost Behavior and Cost-Volume-Profit Analysis 3
Strategy: A variable cost is incurred for each activity, such as producing finished goods.
Fixed costs are incurred regardless of the number of finished goods produced. Mixed
costs have a base rate and an additional cost for each additional activity.
4. The total cost of production for the last four quarters for Moore’s Mowers is shown
below. Use the high-low method to determine the variable cost per unit and the fixed
cost.
Total Cost Units Produced
Quarter 1 $51,000 2,000
Quarter 2 56,400 2,300
Quarter 3 49,200 1,900
Quarter 4 53,700 2,150
Variable cost = $18 per unit; ($56,400 - $49,200)/(2,300 – 1,900)

Fixed cost = $15,000; $56,400 – ($18 × 2,300)
5. With the information for the first four months of production, determine the variable
cost per unit and the fixed cost using the high-low method.

January $155,100 9,000
February 166,350 9,750
March 158,100 9,200
April 157,350 9,150
Variable cost = $15 per unit; ($166,350 - $155,100) / (9,750 – 9,000)

Fixed cost = $20,100; $155,100 – ($15 × 9,000)
6. Calculate the variable cost per unit and the fixed cost using the high-low method for the
production information given.

August $46,800 5,600
September 58,200 7,500
October 42,600 4,900
November 53,880 6,780
Variable Cost = $6 per unit; ($58,200 - $42,600)/(7,500 – 4,900)

Fixed Cost = $13,200; $58,200 – ($6 × 7,500)
4 Chapter 19
Strategy: First, identify the highest and lowest number of units produced. Next, find the
difference between the total cost and units produced for the highest and lowest number
of units produced. Divide the difference between the total costs by the difference of the
number of units produced to calculate the variable cost since the total cost will increase
for the variable costs incurred for each additional product. The difference between the
total cost and the total variable cost is the fixed cost.
7. For 2015, Moore’s Mowers had total sales of $42,000, with each product selling for $15
each. Each product had variable costs of $8. Calculate the (a) contribution margin, (b)
contribution margin ratio, and (c) unit contribution margin. Round contribution margin
ratio to the nearest percent.
Units sold = 2,800; $42,000/$15 per units
a. $19,600; $42,000 – ($8 per unit × 2,800 units)
b. 47%; $19,600/$42,000
c. $7 per unit; $15 – $8
8. During 2015, Cards by Shannon sold 50,000 finished products with a contribution
margin of 55%. The variable costs totaled $40,500 for the year. Calculate the
contribution margin and unit contribution margin.
Sales $90,000
($40,500/100% – 55%)
Sales price per unit $1.80
Variable cost per unit 0.81
Contribution margin per unit $0.99
Contribution margin $49,500
9. If a manufacturing company had a contribution margin of $65,700 for 2015 from selling
25,000 products at $6 each, determine the variable cost per unit, contribution margin
ratio, and unit contribution margin. Round unit answers to two decimal places and
percentages to the nearest percent.
Sales (dollars) $150,000

Contribution margin 65,700
Total variable cost $ 84,300
Variable cost per unit $3.37
Unit contribution margin $2.63
Contribution margin ratio 44%
Strategy: The contribution margin is the sales less variable cost, which is the profit
produced from the sale of goods to contribute to the payment of fixed costs. The unit
contribution margin is the selling price per unit less the variable cost per unit.
Contribution margin ratio is calculated by dividing the contribution margin by total sales
or unit contribution margin by selling price per unit.
10. Use the following information to determine the change in income from operations for
each situation if the company sells its products for $4 each.
a. Contribution margin ratio of 35% and a 10,000 increase in sales units.
$14,000 = 35% × (10,000 units × $4 per unit)
b. Unit contribution margin of $2.10 and an increase of $20,000 in sales.
$10,500 = $2.10 × ($20,000/$4 per unit)
c. Contribution margin of ratio of 30% and an increase in sales of $30,000.
$9,000 = 30% × $30,000
11. Determine the change in income from operations for each situation for a company that
has an increase in total sales of $52,000.
a. Unit contribution margin of $4.50 and each product selling for $8.
$29,250 = $4.50 × ($52,000/$8 per unit)
b. Contribution margin ratio of 24% and each product selling for $10.
$12,480 = 24% × $52,000
c. Unit contribution margin of $6, with total variable costs of $25,000 at $5 per
unit.
$30,000 = $6 × 5,000 units
6 Chapter 19
12. During 2015, Jackson Computer Supply produced income from operations of $95,000
from sales of 80,000 units at $2.50 each. The company’s fixed costs totaled $22,000. If
the company has a 4,000 increase in sales units in the upcoming year, what will income
from operations be for 2016? Assume that fixed costs and the selling price and variable
cost per unit will remain the same.
2016 2015
Sales $210,000 $200,000
Variable costs 87,150 83,000
Contribution margin $122,850 $117,000
Fixed costs 22,000 22,000
Income from operations $100,850 $ 95,000
2015 Contribution margin = $95,000 + $22,000

2015 Variable costs = $200,000 – $117,000
Change in income from operations = $5,850 = ($117,000/$200,000) × $10,000
Strategy: The change in income from operations can be determined using the unit
contribution margin or the contribution margin ratio. If fixed costs remain the same, the
only difference in income from operations is the difference in sales and variable costs.
The change in income from operations is calculated by the change in sales dollars
multiplied by the contribution margin or the unit contribution margin multiplied by the
change in unit sales.
13. A new manufacturing company would like to know the sales needed to break-even for
the first year of operations. The expected total fixed costs will be $27,000 for 15,000
units. The company expects to sell the units for $10 each and incur variable cost of $4
per unit. Determine the break-even sales point in dollars and units.
Unit contribution margin = $6 = $10 – $4
Break-even point (units) = 4,500 units = $27,000/$6
Contribution margin ratio = 60% = $90,000/$150,000 or $6/$10
Break-even point (sales) = $45,000 = $27,000 / 60% or 4,500 units × $10 per unit
14. The production manager at Athletix would like to know the break-even point for the
company’s goods in sales dollars and units. During the past year, the company earned
an income from operations of $69,600. The contribution margin for the year was
$120,000 after selling 50,000 units at $4 each. Determine the sales and units sold
needed at the break-even point.
Sales $200,000
Variable costs 80,000
Fixed costs 50,400
Income from operations $ 69,600
Unit contribution margin = $2.40 = $120,000/50,000 units

Break-even point (units) = 21,000 units = $50,400/$2.40
Contribution margin ratio = 60% = $120,000/$200,000
Break-even point (sales) = $84,000 = $50,400/60% or 21,000 × $4 per unit
15. After earning a loss of $6,000 from operations in 2015, the production manager would
like to know the break-even point in sales and units for the company. During 2015, the
company sold 6,000 at $3 each. Variable costs for the year totaled $10,800. Determine
the sales and units sold that were needed to break-even.
Sales $18,000
Fixed costs 13,200
Income from operations $(6,000)
Unit contribution margin = $1.20 = $7,200/6,000 units

Break-even point (units) = 11,000 = $13,200/$1.20
Contribution margin ratio = 40% = $7,200/$18,000
Break-even point (sales) = $33,000 = $13,200/40% or 11,000 × $3 per unit
Strategy: The break-even point is the point at which income from operations is zero,
which means the company sold enough products to create a contribution margin to
cover the fixed costs exactly. The break-even point in units can be calculated by dividing
the fixed costs by the unit contribution margin. Break-even point in sales is calculated by
the fixed costs divided by the contribution margin ratio.
8 Chapter 19
16. Would each of the following cause the break-even point to increase or decrease?
a. Decrease in selling price of $5 per unit.
Increase
b. Decrease in variable costs of $1 per unit.
Decrease
c. Increase in fixed costs by $12,000.
Increase
17. A clothing manufacturer has a current break-even point of 3,200 units, which sell for $8
each. The company’s fixed cost total $12,800. Determine the new units needed to break
even in each situation.
a. Increase in selling price to $9 per unit.
Decrease to 2,560 units = $12,800/$5 per unit
b. Decrease fixed costs by 5%.
Decrease to 3,040 units = ($12,800 × 95%)/$4 per unit
c. Increase variable costs by $2 per unit.
Increase to 6,400 units = $12,800/$2 per unit
18. In 2015, a paper manufacturer has the income from operations shown below for sales of
7,500 units. Determine the new break-even sales in each situation. Round answers to
the nearest whole sales dollar.
Sales $60,000
Fixed costs 19,200
Income from operations $16,800
Current break-even sales = $32,000 = $19,200/60%

Sales price per unit = $8.00
Variable cost per unit = $3.20
a. Decrease in selling price per unit by 20%.
Sales price per unit = $6.40
Contribution margin ratio = $3.20/$6.40
Increase in break-even sales to $38,400 = $19,200/50%
b. Increase in fixed costs by $2,000.
Increase in break-even sales to $35,333 = $21,200/60%
c. Decrease in variable costs by $1.20.
Variable cost per unit = $2.00
Contribution margin ratio = 25%
Increase in break-even sales to $76,800= $19,200/25%
Strategy: An increase in costs will cause the break-even point to increase because more
units must be sold to cover the costs, while a decrease in cost will also decrease the
break-even point. If the selling price increases, the break-even point will decrease
because the increase will also cause the contribution margin to increase. If the selling
price decreases, the break-even point will increase to reflect that more units will need to
be sold to cover the fixed costs.
10 Chapter 19
19. Assume the manufacturer in Exercise 18 would like to earn a target profit of $36,000.
Determine the sales in dollars and units needed to achieve the goal.
Sales (units) = 11,500 units = ($19,200 + $36,000)/$4.80
Sales (dollars) = $92,000 = ($19,200 + $36,000)/60% or 11,500 units × $8 per unit
20. A tire manufacturer sells its finished goods for $80 each. The variable cost to
manufacture each product is $20, while fixed costs equal $20,700. In 2015, the company
earned income from operations of $32,100. In 2016, the CEO would like to increase
income from operations by 5%. Determine the sales in dollars and units needed to
achieve the CEO’s goal. Round answers to the nearest whole number.
Target profit = $33,705 = $32,100 × 1.05
Sales (units) = 907 units = ($20,700 + $33,705)/$60
Sales (dollars) = $72,540 = ($20,700 + $33,705)/75% or 907 units × $80 per unit
*Due to rounding, the two methods will differ by $20 in sales.
21. A paper manufacturer would like to earn an income from operations of $55,006 in 2016.
In 2015, the company had fixed costs of $7,500, but expects this number to increase by
10%. Finished goods sell for $10 each and have variable costs of $2. Determine the sales
in units and dollars in order to earn the target profit. Round answers to the nearest
whole number.
Fixed costs in 2016 = $8,250 = $7,500 × 1.10
Sales (units) = 7,907 units = ($8,250 + $55,006)/$8
Sales (dollars) = $79,070 = ($8,250 + $55,006)/80% or 7,907 units × $10 per unit
Strategy: To earn a certain target income from operations, the company must sell a
certain amount of goods over the break-even point. The company must earn enough
income to cover the fixed costs and produce the target income. To determine the number
of units needed to sell, divide the sum of the fixed costs and target profit by the unit
contribution margin. To determine the sales needed in dollars, divide the sum of the
fixed costs and target profit by the contribution margin ratio.
22. Shooz manufactures finished goods for a variable cost of $30 each and fixed costs of
$15,000. The company sells the goods for $80 each. Prepare a cost-volume-profit chart
for the company.
Break-even point (units) = 300 units = $15,000/$50
Break-even point (sales) = $24,000 = $15,000/62.5% or 300 units × $80 per unit
40,000
35,000
30,000
25,000
20,000 Total Cost
15,000 Total Sales
10,000
5,000
-
0 100 200 300 400 500
23. Use the information in Exercise 22 to prepare a profit-volume chart for Shooz, assuming
that the maximum units of sales is 1,000 units.
40,000
30,000
20,000
Profit Line
10,000
Horizontal Zero
-
0 200 400 600 800 1000
(10,000)
(20,000)
12 Chapter 19
24. Use the chart below to determine the following:

a. Break-even point (units and sales)
200 units for $4,000
b. Selling price per unit
$20 = $4,000/200 units
c. Variable cost per unit
$10 = ($4,000 – $2,000)/200 units
d. Income from operations for 600 units
$4,000 = $12,000 – $8,000 or ($10 per unit × 600 units) – $2,000
14,000
12,000
10,000
8,000
Total Cost
6,000
Total Sales
4,000
2,000
-
0 200 400 600 800
25. Assuming that the maximum unit of sales is 2,000 for the company in Exercise 24,
prepare a profit-volume chart. Also determine the maximum profit and loss the
company can earn.
Maximum profit = $18,000 = 2,000 units × $10 contribution margin per unit – $2,000
Maximum loss = $2,000
20,000
15,000
10,000
Profit
Horizontal Zero
5,000
-
0 500 1000 1500 2000 2500
(5,000)
26. Prepare a cost-volume-profit chart for a company that has an 80% contribution margin
for goods that it sells for $150 each. The company’s fixed costs total $54,000. Also
determine the break-even point in units and sales.
Break-even point (units) = 450 units = $54,000/$120 per unit
Break-even point (sales) = $67,500 = $54,000/80% or 450 units × $150 per unit
160,000
140,000
120,000
100,000
80,000 Total Costs
60,000 Total Sales
40,000
20,000
-
- 200 400 600 800 1,000
14 Chapter 19
Strategy: The cost-volume-profit chart plots two lines, total costs and total sales. The
crossing point, which is when costs equal sales, is the break-even point. Any increase in
goods will generate a profit, which would be the total sales less total costs. If the
company sells less than the units needed at the breaking point, the company incurs an
operating loss.
27. Use the information in Exercise 26 to prepare a profit-volume chart for the company if
the maximum unit of sales is 5,000 units. What is the company’s maximum profit and
loss?
Maximum profit = $546,000 = ($150 - $30) × 5,000 units - $54,000
Maximum loss = $54,000
600,000
500,000
400,000
300,000
Profit
Horizontal Zero
200,000
100,000
-
- 2,000 4,000 6,000
(100,000)
Strategy: The profit-volume chart shows the largest loss and profits the company could
generate. The largest possible loss is the y-intercept of profit, which represents zero
sales. The largest possible profit represents the income when the company produces at
maximum capacity.
28. Cold Weather Gear manufactures two products, Jackets and Hats. During the past year,
the company incurred $124,800 of fixed costs. Use the information shown below to
calculate the break-even point in units of each product and total sales for the company.
Use the sales mix to determine the mixed product.
Jackets Hats Mixed Product

Unit selling price $55 $15 $45.40
Unit variable cost 15 3 12.12
Unit contribution margin $40 $12 $33.28
Units sold 95,000 30,000
Sales mix 76% 24%
Mixed product unit selling price = ($55 × 76%) + ($15 × 24%)

Mixed product unit variable cost = ($15 × 76%) + ($3 ×24%)
Break-even point (units) for mixed product = 3,750 units = $124,800/$33.28
Unit sales of Jackets = 2,850 units = 3,750 × 76%
Unit sales of Hats = 900 units = 3,750 × 24%
Break-even point (sales) = $170,250 = (2,850 units × $55 per unit) + (900 units × $15 per
unit) or 3,750 units × $45.40 per unit
16 Chapter 19
29. A manufacturing company produces three products, as shown below. For 2015, the
company incurred costs of $102,500, but expects this number to remain the same in the
upcoming year. Determine the break-even point in unit sales per product and total sales
for 2016. Round percentages to the one decimal place and all others to three decimal
places. Use the sales mix to determine the mixed product.
Product A Product B Product C Mixed Product

Unit selling price $105 $120 $110 $110.000
Unit variable cost 65 105 88 84.375
Unit contribution margin $ 40 $ 15 $ 22 $ 25.625
Units sold 8,000 4,000 20,000
Sales mix 25.0% 12.5% 62.5%
Mixed product unit selling price = ($105 × 25%) + ($120 × 12.5%) + ($110 × 62.5%)
Mixed product unit variable cost = ($65 × 25%) + ($105 × 12.5%) + ($88 × 62.5%)
Break-even point (units) for mixed product = 4,000 units = ($102,500)/$25.625
Unit sales of Product A = 1,000 units = 4,000 × 25%
Unit sales of Product B = 500 units = 4,000 × 12.5%
Unit sales of Product C = 2,500 units = 4,000 × 62.5%
Break-even point (sales) = $440,000 = (1,000 units × $105 per unit) + (500 units × $120
per unit) + (2,500 units × $110 per unit) or 4,000 units × $110 per unit
30. A manufacturing company produces Widgets and Gadgets. For 2015, the company’s
fixed costs totaled $70,620 and expects this number to increase by 10% in the upcoming
year. Determine the break-even point in unit sales per product and total sales for the
upcoming year with the information below. Round unit sales to one decimal place. Use
the sales mix to determine the mixed product.
Widgets Gadgets Mixed Product

Unit selling price $30 $28 $29.46
Unit variable cost 15 21 16.62
Unit contribution margin $15 $ 7 $12.84
Contribution margin ratio 50% 25%
Units sold 36,500 13,500
Sales mix 73% 27%
Mixed product unit selling price = ($30 × 73%) + ($28 × 27%)

Mixed product unit variable cost = ($15 × 73%) + ($21 × 27%)
Break-even point (units) of mixed product = 6,050 units = ($70,620 × 1.1)/$12.84
Unit sales of Widgets = 4,416.5 units = 6,050 units × 73%
Unit sales of Gadgets = 1,633.5 units = 6,050 units × 27%
Break-even point (sales) = $178,233 = (4,416.5 units × $30 per unit) + (1,633.5 units ×
$28 per unit) or 6,050 units × $29.46 per unit
Strategy: First, determine the sales mix by finding the percentage of total sales for each
product. Next, determine the selling price, variable cost, and unit contribution margin of
a “mixed product,” which represents both products as a single product according to the
sales mix. To find the unit selling price, multiply the unit selling price of each product by
its sales mix and sum the total of all products. The same is done for the unit variable
price and contribution margin. The break-even point of the mixed product is calculated,
which represents how many times the company needs to sell the products at the same
sales mix.
18 Chapter 19
31. Given the information below, calculate the operating leverage for 2015 and 2016,
rounding to two decimal places. Determine which year a 5% increase in sales would
have a larger impact on income from operations.
2016 2015
Sales $425,000 $300,000
Fixed costs 105,000 75,000
Income from operations $175,000 $120,000
Operating leverage 1.60 1.63

$280,000/$175,000 $195,000/$120,000
2015 Percent change in income from operations = 8.15% = 5% × 1.63

2016 Percent change in income from operations = 8.00% = 5% × 1.60
A 5% change in sales would cause a larger change in income from operations in 2015
(8.15%) than in 2016.
32. With the information shown below, calculate the operating leverage for the company,
rounding to two decimal places. Also determine the income from operations if there
was a 10% increase in sales.
Sales $300,000
Fixed costs 79,000
Income from operations $109,000
Operating leverage 1.72

$188,000/$109,000
Percent change in income from operations = 17.2% = 10% × 1.72

Income from operations = $127,748 = $109,000 × (1+ 17.2%)
33. Use the information shown below to calculate the operating leverage for the two
companies. Round answers to two decimal places. Also determine which company
would have a higher income from operations if sales decreased by 2%.
ABC Corp. XYZ Corp.

Sales $490,000 $975,300
Fixed costs 99,750 207,500
Income from operations $284,900 $452,800
Operating leverage 1.35 1.46

$384,650/$284,900 $660,300/$452,800
Percent change in income from operations 2.70% 2.92%
2% × 1.35 2% × 1.46
ABC Corp. would have a higher income from operations if a 2% decrease in sales
occurred. The income from operations would decrease by 2.70%, while XYZ Corp.
income from operations would decrease by 2.92%.
Strategy: Operating leverage is calculated by dividing the contribution margin by income
from operations. Operating leverage represents if a company incurs a large or small
amount of fixed costs. If a company has a high operating leverage, it will be more
sensitive to changes in sales since most of the costs incurred are fixed. If a company has
a low operating leverage, it incurs mostly variable costs rather than fixed, so it is less
sensitive to a change in sales.
34. ABC Corporation has a break-even point of 2,000 units, which sell for $5 each. The
company made total sales of $75,000 each. Calculate the company’s margin of safety in
dollars, units, and percent of current sales, rounding to one decimal place.
Margin of safety (dollars) = $65,000 = $75,000 – $10,000
Margin of safety (units) = 13,000 units = 15,000 – 2,000
Margin of safety (percent of current sales) = 86.7% = ($75,000 – $10,000)/$75,000
20 Chapter 19
35. Determine the margin of safety in dollars, units, and percent of current sales for a
manufacturer that incurs $20,000 of fixed cost to produce 5,000 finished goods that
have a 25% contribution margin. The finished goods sell for $40 each.
Break-even point (sales) = $80,000 = $20,000/25%
Break-even point (units) = 2,000 units = $80,000/$40 per unit
Margin of safety (units) = 3,000 units = 5,000 – 2,000
Margin of safety (percent of current sales) = 60% = ($200,000 – $80,000)/$200,000
36. Use the information below to calculate the margin of safety in dollars, units, and as a
percentage of sales for the upcoming year if the company expects for sales to increase
by 5%. Each finished good sells for $100. Round percentages to one decimal place and
units to the nearest whole unit.
Sales $250,700
Fixed costs 85,840
Income from operations $ 59,566
Break-even point (sales) = $148,000 = $85,840/58%

Break-even point (units) = 1,480 units = $148,000/$100
Sales in upcoming year = $263,235 = $250,700 × 1.05
Margin of safety (units) = 1,152 units = $263,235/$100 per unit – 1,480 units
Margin of safety (percent of current sales) = 43.8% = ($263,235 – $148,000)/$263,235
Strategy: The margin of safety is how much income over the break-even point the
company generates and how much extra costs the company can generate before
reaching a zero income from operations. The margin of safety in units is found by
subtracting the break-even point unit sales from the unit sales. The margin of safety in
dollars is found by subtracting the sales in dollars less the break-even point sales. The
margin of safety as a percent of current sales is found by the dividing the margin of
safety in sales by the total sales.

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Chapter 19

Cost Behavior and Cost-Volume-Profit Analysis

5. Change in sales dollars

6. Unit contribution margin

7. Change in sales units

8. Break-even sales (units)

9. Contribution margin ratio

10. Fixed costs

11. Contribution margin ratio

12. Income from operations

13. Percent change in income from operations

15. Break-even sales (dollars)

16. Sales (units)

Variable cost = $18 per unit; ($56,400 - $49,200)/(2,300 – 1,900)

Total Cost Units Produced

Variable cost = $15 per unit; ($166,350 - $155,100) / (9,750 – 9,000)

Total Cost Units Produced

Variable Cost = $6 per unit; ($58,200 - $42,600)/(7,500 – 4,900)

Sales (dollars) $150,000

2015 Contribution margin = $95,000 + $22,000

Unit contribution margin = $2.40 = $120,000/50,000 units

Unit contribution margin = $1.20 = $7,200/6,000 units

Current break-even sales = $32,000 = $19,200/60%

24. Use the chart below to determine the following:

Jackets Hats Mixed Product

Mixed product unit selling price = ($55 × 76%) + ($15 × 24%)

Product A Product B Product C Mixed Product

Widgets Gadgets Mixed Product

Mixed product unit selling price = ($30 × 73%) + ($28 × 27%)

Operating leverage 1.60 1.63

2015 Percent change in income from operations = 8.15% = 5% × 1.63

Operating leverage 1.72

Percent change in income from operations = 17.2% = 10% × 1.72

ABC Corp. XYZ Corp.

Operating leverage 1.35 1.46

Break-even point (sales) = $80,000 = $20,000/25%

Break-even point (units) = 2,000 units = $80,000/$40 per unit

Margin of safety (dollars) = $120,000 = $200,000 – $80,000

Margin of safety (units) = 3,000 units = 5,000 – 2,000

Margin of safety (percent of current sales) = 60% = ($200,000 – $80,000)/$200,000

Break-even point (sales) = $148,000 = $85,840/58%

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