Accounting: What the Numbers Mean
11th Edition
ISBN: 9781259535314
Author: David Marshall, Wayne William McManus, Daniel Viele
Publisher: McGraw-Hill Education
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Textbook Question
Chapter 12, Problem 12.32C
Case 12.32
LO 12
Understanding the effects of operating leverage HighTech, Inc., and OldTime Co. compete within the same industry and had the following operating results in 2015:
| HighTech, |
Inc.
Co.
Required:
- Calculate the break-even point for each firm in terms of revenue.
- What observations can you draw by examining the break-even point of each firm given that they earned an equal amount of operating income on identical sales volumes in 2015?
- Calculate the amount of operating income (or loss) that you would expect each firm to report in 2016 if sales were to
- Increase by 20%.
- Decrease by 20%.
- Using the amounts computed in requirement c, calculate the increase or decrease in the amount of operating income expected in 2016 from the amount reported in 2015.
- Explain why an equal percentage increase (or decrease) in sales for each firm would have such differing effects on operating income.
- Calculate the ratio of contribution margin to operating income for each firm in 2015. (Hint: Divide contribution margin by operating income.)
- Multiply the expected increase in sales of 20% for 2016 by the ratio of contribution margin to operating income for 2015 computed in requirement f for each firm. (Hint: Multiply your answer in requirement f by 0.2.)
- Multiply your answer in requirement g by the operating income of $210,000 reported in 2015 for each firm.
- Compare your answer in requirement h with your answer in requirement d. What conclusions can you draw about the effects of operating leverage from the steps you performed in requirements f, g, and h?
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Students have asked these similar questions
9
Sales
Variable expenses
Contribution margin
Fixed expenses
Net operating income
Amount
$ 96,000
38,400
57,600
45,120
$ 12,480
$
Mereu
Required:
1. What is the company's degree of operating leverage?
2. Using the degree of operating leverage, estimate the impact on net operating income of a 7% increase in unit sales.
3. Construct a new contribution format income statement for the company assuming a 7% increase in unit sales.
Complete this question by entering your answers in the tabs below.
Sales
100%
40
60%
Required 1 Required 2
Required 3
Construct a new contribution format income statement for the company assuming a 7% increase in unit sales.
Engberg Company
Contribution Income Statement
Amount
0
Percent of Sales
%
%
Required 2
0%
Required 3 >
8
The sales and cost data for two companies in the transportation industry are as follows:
X Company
Amount
$ 132,000
79,200
Sales
Variable costs
Contribution margin
Fixed costs
Operating income (B)
The annual breakeven point in sales dollars for X Company is:
52,800
36,300
$ 16,500
Percent
100.00
60.00
40.00
Y Company
Amount
$ 132,000
39,600
92,400
72,350
$ 20,050
Percent
100.00
30.00
70.00
QUESTION 6
You have information about 4 different companies below in the table. The variable and fixed costs are expressed as the percentage of revenue based on the current sales. The companies are otherwise very similar. Which of these companies is probably have the highest degree of operating
leverage?
A B с D
Variable cost (%) 35% 27% 50% 80%
50% 60% 30% 5%
Fixed cost
O Project A
O Project D
O Project C
O Project B
Chapter 12 Solutions
Accounting: What the Numbers Mean
Ch. 12 - Prob. 12.1MECh. 12 - Prob. 12.2MECh. 12 - Prob. 12.3MECh. 12 - Prob. 12.4MECh. 12 - Prob. 12.5MECh. 12 - Prob. 12.6MECh. 12 - Exercise 12.7 LO 3 Cost classifications For each...Ch. 12 - Exercise 12.8 LO 3 Cost classifications For each...Ch. 12 - Prob. 12.9ECh. 12 - Prob. 12.10E
Ch. 12 - Prob. 12.11ECh. 12 - Prob. 12.12ECh. 12 - Prob. 12.13ECh. 12 - Prob. 12.14ECh. 12 - Exercise 12.15
LO 8, 9
Special promotion—effects...Ch. 12 - Prob. 12.16ECh. 12 - Problem 12.17 LO 6 High-low method A department of...Ch. 12 - Problem 12.18
LO 6
High-low method—missing amounts...Ch. 12 - Prob. 12.19PCh. 12 - Prob. 12.20PCh. 12 - Prob. 12.21PCh. 12 - Prob. 12.22PCh. 12 - Prob. 12.23PCh. 12 - Prob. 12.24PCh. 12 - Prob. 12.25PCh. 12 - Problem 12.26 LO 8. 9, 10, 11 CYP...Ch. 12 - Prob. 12.27PCh. 12 - Prob. 12.28PCh. 12 - Prob. 12.29CCh. 12 - Prob. 12.30CCh. 12 - Prob. 12.31CCh. 12 - Case 12.32 LO 12 Understanding the effects of...Ch. 12 - Prob. 12.33C
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