Exam 4: Cost-Volume-Profit Relationships

Kilimanjaro Company (KC)makes and sells one product: dehydrated meals for backpacking.Both the average sales price per meal and the average variable cost per meal remain constant regardless of the number meals prepared and sold.Reported sales and after-tax operating income for Year 8 were 25,000 meals and $72,000,respectively.Fixed costs depend on number of meals prepared and sold,as the following schedule shows: KC expects the cost structure and average selling price per meal for Year 8 NOT to change in Year 9.Maximum plant capacity will also remain at 76,000 meals in Year 9.The company can sell every meal it prepares and its marginal income tax rate of 40 percent for Year 8 will also remain unchanged in Year 9. Required: a)Calculate the dollar contribution margin per meal for Year 8 when 25,000 meals were prepared and sold. b)Calculate KC's expected break-even point for Year 9 for EACH of the THREE ranges of meals preparation and sales.If there is no break-even point for a given range of meals preparation and sales level state so,including a brief (but clear)explanation. c)Calculate the number of meals KC must prepare and sell in Year 9 to maximize its after-tax operating income. d)Calculate KC's (i)degree of operating leverage and (ii)margin of safety percentage for Year 8 when 25,000 meals were prepared and sold. e)Using ONLY the degree of operating leverage number you just calculated in part (d)above,calculate the expected dollar amount increase or decrease in before-tax operating income if KC expects to prepare and sell 22,500 meals in Year 9.(NOTE: No credit will be given for answers that include preparation of an income statement for the 22,500 meals. )

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