Stuart Manufacturing produces metal picture frames (A+)

Stuart Manufacturing produces metal picture frames. The company\’s external income statements for the last two years are given below:

Details Last Year This Year Next Year Units Sold 50000 70000 Sales Revenue 800000 1120000 Cost of Goods Sold 500000 640000 Gross Margin 300000 480000 S,G,& A 120000 120000 Net Operating Income 180000 360000

The company has no beginning or ending inventories. Manufacturing costs are both variable and fixed, while S,G&A costs are strictly fixed. Next year, the company expects sales to increase by 20%.


1. Use the “high-low” method to estimate the variable manufacturing cost per unit and the total fixed manufacturing cost.

Variable Mfg. cost per unit=

Total Fixed Mfg. costs=

2. How much total contribution margin was earned LAST year?

3. What was the degree of operating leverage THIS year?

4. If sales increase by 20% and the cost structure remains the same as in prior years, how much net operating income should they earn NEXT year?

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