Sales in units fixed exp operating income CM per unit CM per unit sales price per unit variable cost per unit of packages solved of packages in problem X Ten Toes would have to sell X more packaged of socks to earn 29 000 of operating income The increase in fixed costs was not completely offset by the decrease in variable costs at the prior target profit volume of sales Therefore Ten Toes will need to sell more units in order to achieve its target profit level margin of safety in dollars target sales in dollars breakeven sales in dollars o target sales in dollars fixed exp operating income CM ratio o breakeven sales in dollars fixed exp 0 operating income CM ratio CM ratio 1 variable exp ratio margin of safety as a margin of safety in target sales in operating leverage factor CM operating income o CM target sales X CM ratio operating leverage factor X volume decrease CM per unit sales price per unit variable cost per unit CM ratio CM per unit sales price per unit breakeven sales in units fixed exp operating income CM per unit breakeven sales in dollars fixed exp operating income CM ratio target sales unit fixed exp operating income CM per unit target sales in dollars fixed exp operating income CM ratio new fixed exp sales in dollars X CM ratio operating income amount of fixed costs to cut old fixed exp new fixed exp target sales unit fixed exp operating income CM per unit CM per unit sales price per unit variable cost per unit breakeven sales in units fixed exp operating income weighed avg CM per unit sales price per unit deduct variable exp per unit CM per unit sales mix in units CM weighted avg CM per unit standard fixed weighted avg CM per unit X 3 5 chrome fixed weighted avg CM per unit X 2 5 Sales price per ticket Less Variable cost per ticket CM per ticket Sales mix CM Weighted avg CM per unit Simple average CM avg of CM per ticket The weighted avg is less than the simple avg because Flow Cruiseline sells more regular cruises which have a lower CM than executive cruises The weighted avg CM is higher than the CM of regular cruises because Flow Cruiseline sells some executive cruises and they have a higher CM than regular cruises Because the new sales mix creates a higher weighted avg CM Flow Cruiseline will need to sell fewer cruises in total to breakeven than when they just sold regular cruises market price of similar homes less target profit target costs vs actual current variable cost expected excess profit profit shortfall not be able fall short shortfall current variable cost plus variable cost of upgrade total variable cost desired profit cost plus price lower than more than should more Sales Rev Less Variable Exp CM Less Fixed Exp Op income loss variable exp sales variable exp rate sales X variable exp rate variable exp breakeven sales in dollars fixed exp 0 operating income CM ratio CM ratio CM per unit sales rev High Low Method easy to use only uses 2 data points high and low volume points machine hours in cost y in volume x breakeven sales in dollars fixed exp operating income CM ratio CM ratio CM per unit sales price per unit Lei Wong s franchising concept is a good idea She expects most locations could sell more than the sales required to earn the target profit margin of safety in units expected sales in units breakeven sales in units margin of safety in dollars expected sales in dollars breakeven sales in dollars margin of safety as a of sale margin of safety in expected sales in operating income increase CM per passenger X additional tickets sold o CM per unit sales price per unit variable cost per unit breakeven units fixed exp 0 operating income CM per unit CM per unit sales price per unit variable cost per unit Variable cost per unit Direct materials Direct labor Variable overheard Purchase price from outsider Total variable cost per unit Decision make less if make cost lower Variable cost per unit Units needed Total variable costs Fixed costs Total relevant costs Decision make less cost if making switches cost if outsourcing variable fixed variable fixed less than breakeven sales fixed exp 0 operating income CM ratio CM ratio CM per unit sales price per unit operating leverage factor CM operating income o CM expected units sold X sales price variable cost o operating income total CM fixed exp in operating income in volume X operating leverage factor CM per unit sales price per unit variable cost per unit CM ratio CM per unit sales price per unit operating income total CM fixed exp o total CM CM per passenger X of passengers o total CM CM ratio X sales rev operating leverage factor CM operating income o CM expected units sold X sales price variable cost o operating income total CM fixed exp percentage operating income will increase by breakeven sales in units fixed exp operating income weighed avg CM per unit regular breakeven units X 4 5 executive breakeven units X 1 5 High Operating Leverage companies have higher fixed costs lower variable costs changes in volume significantly affect operating income golf course hotel rental car agencies theme parks airlines Low Operating Leverage companies have higher variable costs and no fixed costs change in volve does NOT have significant affect on operating income merchandising companies walmart or marcs expected increase in rev expected increase in exp variable manufacturing cost fixed manufacturing cost 0 total expected increase in exp expected increase decrease in operating income decision do not discontinue DVD if negative incorrect will still fixed exp for DVD expected increase in rev expected increase in exp variable manufacturing cost fixed manufacturing cost in question total expected increase in exp expected increase decrease in operating income decision do not discontinue DVD if negative will still exceed expected increase in rev expected increase in exp variable manufacturing cost fixed manufacturing cost new in question total expected increase in exp expected increase decrease in operating income decision discontinue DVD if positive is now less than Price Takers lacks uniqueness heavy competition target costing Price Setters unique products less competition cost plus pricing sales price per unit variable cost per unit CM per unit units produced with equivalent for machine hours CM for equivalent of machine hours produce with highest CM only deluxe model expected increase in rev expected increase in exp variable manufacturing cost fixed manufacturing cost total expected increase in exp expected increase