Elgart Company produces plastic mailboxes. The projected income statement for the coming year follows:
Sales …………… $460,300
Total variable cost ……… 165,708
Contribution margin …….. $294,592
Total fixed cost ……….. 150,000
Operating income ……… $144,592
1. Compute the contribution margin ratio for the mailboxes.
2. How much revenue must Elgart earn in order to break even?
3. What is the effect on the contribution margin ratio if the unit selling price and unit variable cost each increase by 15 percent?
4. Suppose that management has decided to give a 4 percent 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. 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.