QUESTION 3: 20 marks SHOW ALL SUPPORTING CALCULATIONS FOR THIS PROBLEM. NO MARKS WILL BE AWARDED FOR ANSWERS TO THE PROBLEMS UNSUPPORTED BY CLEARLY SHOWN CALCULATIONS
Denbury Hospitality Products, Inc. is a small-sized food product manufacturer based in the Rocky Mountain regions of the US Midwest. The company started operations in January 2005 and quickly gained a reputation for its highly popular designer cakes. The following information is taken from the company's budget for 2021:
Sales: 5,100 units, $897,600
Variable costs: $714,000
Fixed costs: $139,600
Required:
1. Determine the break-even point in units and dollars for 2021. (4 marks)
2. What sales volume in dollars would be necessary to earn an after-tax net operating income of $80,800 if the income tax rate is 35 percent? (4 marks)
3. What sales volume in units would be necessary to earn a profit before tax equal to 20 percent of sales? (4 marks)
4. What effect would an increase of 16 percent in the selling price per unit have on the break-even point? (4 marks)
5. Compute a) the degree of operating leverage, and b) the margin of safety in both dollar and percentage terms. (4 marks)