Answer Happy

Problem 3-55 (Algo) CVP, Operating Leverage, and Margin of
Safety (LO 3-1, 3, 4)
Lemon Ltd. offers executive training seminars using, in part,
recorded lectures of a well-known speaker. The agreement calls for
Lemon to pay a royalty for the use of the lectures. The lecturer's
agent offers Lemon two options. The first option is revenue-based
and Lemon agrees to pay 25 percent of its revenues to the speaker.
The second option is a flat rate of $360,000 annually for the use
of the lectures in these seminars. The royalty agreement will run
one year and the royalty option chosen cannot be changed during the
agreement. All other royalty terms are the same.
Lemon charges $1,600 for the seminar and the variable costs for
the seminar (excluding any royalty) is $400. Annual fixed costs
(excluding any royalties) are $540,000.
Required:
a. What is the annual break-even level
assuming:
b. At what annual volume would the
operating profit be the same regardless of the royalty option
chosen?
c. Assume an annual volume of 1,500
seminars. What is the operating leverage assuming:
d. Assume an annual volume of 1,500
seminars. What is the margin of safety assuming: