AFM102 Lecture Notes - Lecture 7: Operating Leverage

46 views2 pages

viridianleopard866

26 Jan 2017

School

University of Waterloo

Department

Accounting & Financial Management

Course

AFM102

Professor

Jie Joyce Tian

For unlimited access to Class Notes, a Class+ subscription is required.

Document Summary

X * cm per unit = target income. To get bep: target income = fixed expenses. Why do companies choose to have structures with either more or less variable/fixed costs. Leverage: using debt as a leverage to help you make more money. Degree of operating leverage = cm/operating income. Measure of the sensitivity of oi to % change in sales. Higher leverage: small change in sales = larger shift in oi. % change in operating income = % change in sales * operating leverage (new sales - old sales)/ old sales. Higher fixed costs (same sales and total expenses) = higher leverage. Indifference point (similar to p4-31: find equations for both cost lines, set the two equations equal to each other and solve for x. Cost 1 = + 1. 2dlh * /dlh + 0. 75*1. 2*14 + 4. Relative proportions of product sales - expresses as a % of total sales. Chapter 5: systems design - job order costing.

Related Questions

1) Zehms,Inc. has a contribution margin per unit of $21 and a contributionmargin ratio of 60%. How much is the selling price of eachunit?

A) Cannot be determinedwithout more information

B) $35

C) $52.50

D) $12.60

2)Which ofthe following statements is nottrue?

A.When acompany's sales revenue is increasing, high operating leverage isgood because it means that profits will increaserapidly.

B.When acompany's sales revenue is decreasing, high operating leverage isgood because it means that profits will decrease at a slower pacethan revenues decrease.

C.Operatingleverage refers to the extent to which a company's net incomereacts to a given change in sales.

D. Companies that have higher fixed costs relative to variablecosts have higher operating leverage.

3. WarnerManufacturing reported sales of $2,000,000 last year (100,000 unitsat $20 each), when the break-even point was 75,000 units. Warner'smargin of safety ratio is

A.33%. B.25%.C.75%. D.125%

4. In2012, Raleigh sold 1,000 units at $500 each, and earned net incomeof $50,000. Variable expenses were $300 per unit, and fixedexpenses were $150,000. The same selling price is expected for2013. Raleigh's variable cost per unit will rise by 10% in 2013 dueto increasing material costs, so they are tentatively planning tocut fixed costs by $15,000. How many units must Raleigh sell in2013 to maintain the same income level as 2012?

Financial and Managerial Accounting, 13th Edition Carl S.Warren, James M. Reeve, Jonathan E. Duchac

Contribution Margin and Contribution Margin Ratio

For a recent year, McDonald's company-owned restaurants had thefollowing sales and expenses (in millions):

Sales	$18,602.5
Food and packaging	$ 6,318.2
Payroll	4,710.3
Occupancy (rent, depreciation, etc.)	4,195.2
General, selling, and administrative expenses	2,445.2
	17,668.9
Income from operations	$ 933.6

Assume that the variable costs consist of food and packaging,payroll, and 40% of the general, selling, and administrativeexpenses.

a. What is McDonald's contribution margin?Round to the nearest tenth of a million (one decimal place).
$ million

b. What is McDonald's contribution marginratio? Round to one decimal place.
%

c. How much would income from operationsincrease if same-store sales increased by $900 million for thecoming year, with no change in the contribution margin ratio orfixed costs? Round your answer to the nearest tenth of a million(one decimal place).
$ million

Break-Even Sales and Sales to Realize Income from Operations

For the current year ended March 31, Benatar Company expectsfixed costs of $1,250,000, a unit variable cost of $100, and a unitselling price of $140.

a. Compute the anticipated break-even sales(units).
units

b. Compute the sales (units) required torealize income from operations of $150,000.
units

Feedback

a. Fixed costs divided by the unit contribution margin equalsbreak-even point in units.

b. (Fixed costs + Target profit) divided by unit contributionmargin = sales units.

Learning Objective 3.

Beck Inc. and Bryant Inc. have the following operating data:

	Beck Inc.	Bryant Inc.
Sales	$1,250,000	$2,000,000
Variable costs	750,000	1,250,000
Contribution margin	$500,000	$750,000
Fixed costs	400,000	450,000
Income from operations	$100,000	$300,000

a. Compute the operating leverage for Beck Inc.and Bryant Inc. If required, round to one decimal place.

Beck Inc.
Bryant Inc.

b. How much would income from operationsincrease for each company if the sales of each increased by 20%? Ifrequired, round answers to nearest whole number.

	Dollars	Percentage
Beck Inc.	$	%
Bryant Inc.	$	%

c. The difference in the of income fromoperations is due to the difference in the operating leverages.Beck Inc.'s operating leverage means that its fixed costs are apercentage of contribution margin than are Bryant Inc.'s.

champagneguinea-pig139

PROBLEM 5-30 Graphing; Incremental Analysis; Operating Leverage [L05-2, L05-4, L05-5, L05-6, LO5-8] Angie Silva has recently opened The Sandal Shop in Brisbane, Australia, a store that specializes in fashionable sandals. Angie has just received a degree in business and she is anxious to apply the principles she has learned to her business. In time, she hopes to open a chain of sandal shops. As a first step, she has prepared the following analysis for her new store: $40 $24 Sales price per pair of sandals ........ Variable expenses per pair of sandals ..... Contribution margin per pair of sandals ...... Fixed expenses per year: Building rental ......... Equipment depreciation .. Selling ....... Administrative ..... Total fixed expenses ...... $15,000 7,000 20,000 18,000 $60,000 Required: 1. How many pairs of sandals must be sold each year to break even? What does this represent in total sales dollars? 2. Prepare a CVP graph or a profit graph for the store from zero pairs up to 4,000 pairs of sandals sold each year. Indicate the break-even point on your graph. 3. Angie has decided that she must earn at least $18,000 the first year to justify her time and effort. How many pairs of sandals must be sold to reach this target profit? 4. Angie now has two salespersons working in the store—one full time and one part time. It will cost her an additional $8,000 per year to convert the part-time position to a full-time position. Angie believes that the change would bring in an additional $25,000 in sales each year. Should she convert the position? Use the incremental approach. (Do not prepare an income statement.) Refer to the original data. During the first year, the store sold only 3,000 pairs of sandals and reported the following operating results: Sales (3,000 pairs) ..... Variable expenses ..... Contribution margin ... Fixed expenses ....... Net operating income..... $120,000 48,000 72,000 60,000 $ 12,000 a. What is the store's degree of operating leverage? b. Angie is confident that with a more intense sales effort and with a more creative adver- tising program she can increase sales by 50% next year. What would be the expected percentage increase in net operating income? Use the degree of operating leverage to compute your answer.

AFM102 Lecture Notes - Lecture 7: Operating Leverage

Document Summary

Get access

Related Documents

AFM102 Chapter Notes - Chapter 8: Total Absorption Costing, Earnings Before Interest And Taxes, European Cooperation In Science And Technology

AFM102 Chapter Notes - Chapter 7: Contribution Margin, Fixed Cost, Earnings Before Interest And Taxes

AFM102 Chapter Notes - Chapter 4: Operating Leverage, Contribution Margin, Fixed Cost

Related Questions