New Product Development Accounting Project Math Problem

New Product Development Accounting Project - Math Problem Example Operating Profit $152,124,000 $2,112.83 *COMPUTATIONS FOR INCOME STATEMENT Sales = Total sales units * Total per unit sale = 72000 * 14,500 = $1,044,000,000 Total Variable Expenses = Variable cost per unit * Total sales units = 8,770.5* 72000 = $631,476,000 BREAK EVEN ANALYSIS Number of Sales Units for Break Even: Break Even Sales Units = Fixed Cost Price - Variable Cost per unit = 260,400,000 5729.5 = 45,449 units. Sales Volume In Dollars for Break Even Total Sales = Total break even units * Total sales units = 45,449 * 14,500 = $659,010,500 Profit if the Sales is 6000 Units Per Month Sales per year = 6000*12 = 72000 units Profit per month = $152,124,000 Sales per month = 6000 units Profit per month = 152,124,000 / 12 = $12,677,000 Required 3: Based on the contribution income statement, the operating leverage ratio and margin of safety are calculated below: OPERATING LEVERAGE RATIO: The formula to compute the operating leverage ratio is: Operating Leverage = Contribution Margin/Net Income = $412,524,000/152,124,000 = 2.71 Operating leverage indicates what change in net income can be expected from a change in sales volume. An operating leverage of 2.7 implies that the change in net income will be 2.7 times as large as the change in sales volume. Therefore, for the projected profitability of Water Play Inc. that if sales increased by 10%, net income should increase by 27%. The net income of Water Play Inc. would be 2.7 times greater than its sales volume. MARGIN OF SAFETY: The margin of safety is measured in either dollars or units. It measures... This would be a discretionary cost for the company as the cost on research and development arises form management decision to spend a particular amount and management can reduce it in the short term if it is needed. The management can minimize this cost by delaying for short term, the unnecessary maintenance and repair expenses in the office. Reduction in these costs does not cause an irreparable loss to the company's operations. Operating leverage indicates what change in net income can be expected from a change in sales volume. An operating leverage of 2.7 implies that the change in net income will be 2.7 times as large as the change in sales volume. Therefore, for the projected profitability of Water Play Inc. that if sales increased by 10%, net income should increase by 27%. The net income of Water Play Inc. would be 2.7 times greater than its sales volume. Margin of safety reveals the amount by which actual sales can drop before a firm will incur Loss. The larger the margin: the lesser the risk. (Sales can fall by a larger percentage before the company will show a loss.). The Margin of safety or Safety stock of Water Play Inc. is 26,551 units. It means that the company should maintain 26,551 units as safety stock in order to avoid the risk.