ACTG 2P12 Chapter Notes - Chapter 15: Operating Leverage, Fixed Cost, Earnings Before Interest And Taxes

61 views2 pages

violetmacaw957

13 Mar 2017

School

Department

Course

Professor

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

Document Summary

Degree of operating leverage (dol): cm / operating income (in textbook**) % change net income = dol * change sales. You have been offered the job of managing one of the following two divisions, there is no salary attached to this position. Your compensation is a 50-50 split of any changes in net income with the upper management. 6 * 100% = 600% = ,000 change. In the month after you began to manage your division, a recession hit and sales declined to ,000. The contribution format income statements below are from the beginning of the month when you took over. Using them and your knowledge of cost behavior and degree of operating leverage, prepare new contribution format income statement assuming that sales have declined to ,000. Variable and cm will decrease by 20%, but fc don"t change (4000 10000 / 2) (6 * 20% = 120%*10,000 = Fc > vc, we gave a higher degree of operating leverage.

Related Questions

Steve Smith is ready to complete a cost-volume-profit analysisfor the current year for the U.S. chocolate bar manufacturing plantto determine if the breakeven point is achieved. Specific costs forproduction of 400,000 units include the following:

VariableCost Total Fixed CostTotal

RawMaterial $200,000

Direct ManufacturingLabor $100,000

Indirect ManufacturingLabor $52,500

Factory Insurance andUtilities $31,500

Deprecitaion -- Machinery andFactory $38,000

Repairs and Maintenance --Factory $14,000

Selling, Marketing, and DistributionExpenses $20,000 $40,000

General andAdministrative $60,000

There are no beginning or ending inventories. The total salesfor 400,000 units produced are $1,050,000.

Answer the following questions given the fact pattern above,showing all calculations.

1. What is the contribution margin per unit for each chocolatebar produced given the fact pattern above?

2. What is the Swiss Chocolateâs U.S. division breakeven pointin units and dollars given the fact pattern above?

3. What is the Swiss Chocolateâs U.S. division margin of safetyand degree of operating leverage given the fact pattern above?

4. Assume the fact pattern above changes. Swiss Chocolate wouldlike to hire another salesperson at a fixed salary of $40,000 peryear to focus primarily on marketing through social media. Inaddition, a drought in Brazil has resulted in higher costs for itsmajor raw material, cacao; raw material costs will increase 5 centsper unit. Finally, the U.S. divisionâs parent in Switzerland hasindicated that its forecast target net income for the year is$150,000. What is the level of sales in units and dollars requiredto achieve this targeted level of net income? Assume a 30% taxrate.

5. What cost increases, fixed or variable, result in thegreatest challenge in realizing a desired level of profit? In thecontext of Swiss Chocolate, explain your answer.

bluemallard223

Feather Friends,Inc., distributes a high-quality wooden birdhouse that sells for$20 per unit. Variable
costs are $8 per unit. Andfixed costs total $180,000 per year.
FEATHER FRIENDS, INC.

Unit price	$20
Variable cost per unit	8
Annual fixed costs	180,000

Estimated sales increase	$75,000

Operating results last year:
Sales	$400,000
Less variable expenses	160,000
Contribution margin	240,000
Less fixed expenses	180,000
Net operating income	$60,000

Expected percentage sales increase nextyear	20%
Units sold last year	18,000
percentage reduction in sales price	10%
Increase in advertising expense	$30,000
Expected percentage increase in sales	33%

Increase in sales commission per unit	$1
Required: Answer the following independentquestions.
1. What is the product's CM ratio?
2. Use the CM ratio todetermine the break-even point in sales dollars.
3. Due to an increase indemand, the company estimates that sales will increase by $75,000during the
year.By how much should net operating income increase (or net lossdecrease) assuming that fixed
costs do notchange?
4. Assume that the operatingresult for last were as stated above.
a.Compute the degree of operating leverage at the current level ofsales.
b.The president expects sales to increase by 20% next year. By whatpercentage should net
operatingincome increase?
5. Refer to the original data.Assume that the company sold 18,000 units last year. The salesmanager
isconvinced that a 10% reduction in the selling price, combined witha $30,000 increase in advertising,
wouldcause annual sales in units to increase by one-third. Prepare twocontribution income
statements, one showing the results of last year's operations andone showing the results of
operations if these changes are made. Would you recommend that thecompany do as the sales
managersuggest?
6. Refer to the original data.Assume again that the company sold 18,000 units last year. Thepresident
doesnot want to change the selling price. Instead, he wants to increasethe sales commission by $1
perunit. He thinks that this move, combined with some increase inadvertising, would increase annual
salesby 25%. By how much could advertising be increased with profitsremaining unchanged? Do not
prepare an income statement; use the incremental analysisapproach.

ultramarinegoldfish921

1. Valley Sand and Gravel, Inc. are purchasing a new crusher for$500,000. It will have a ten year life and the salvage can be soldfor $50,000 at the end of year ten. There will be a major repairsat the end of year five and it will cost $10,000. Cash inflows areprojected to be $80,000 per year. The firmâs cost of capital is14%.

Calculate the NPV of the project.

Should they accept the project or not, and why?

2. Refer to Exhibits A and B below to answer the questions thatfollow.

Exhibit A
Jordan Corporation
Balance Sheet
September 30, 2015

Assets

Current Assets (in dollars)

Cash: 500,000

Accounts receivable: 600,000

Inventory: 950,000

Prepaid expenses: 50,000

Total Current Assets:2,100,000

Property, Plant and Equipment (in dollars)

Land: 250,000

Buildings, net of depreciation: 300,000

Equipment, net of depreciation: 800,000

Total Property, Plant and Equipment: 1,350,000

Total Assets: 3,450,000

Liabilities (in dollars)

Current Liabilities

Accounts payable: 700,000

Wages payable: 200,000

Interest payable: 25,000

Total Current Liabilities: 925,000

Long Term Liabilities

Notes Payable: 500,000

Bonds Payable: 450,000

Long Term Liabilities: 950,000

Total Liabilities: 1,875,000

Shareholders' Equity (in dollars)

Common stock: 500,000

Additional paid in capital: 100,000

Retained earnings: 975,000

Total Shareholder equity: 1,575,000

Total Liabilities and Equity: 3,450,000

Exhibit B
Jordan Corporation
Statement of Operations
Year Ended September 30, 2015

All figures in dollars

Sales: 6,000,000

Cost of goods sold: 3,600,000

Gross margin: 2,400,000

Selling and administrative expenses: 1,950,000

Operating income: 450,000

Interest expense: 50,000

Income before taxes: 400,000

Income taxes: 100,000

Net income: 300,000

Classify each of the above below as a liquidity, assetmanagement, financial leverage or profitability measure.

Quick (Acid Test) ratio

Current ratio

Accounts payable period

Collection period

Inventory turnover

Total debt to total assets

Interest coverage

Operating income margin

Net income margin

Return on assets

Return on equity

3. YouWin! manufacturers and sells custom wooden trophies. Eachof the companyâs two divisions, production and sales, has a managerwho is responsible for all costs in his/her division. The followingare selected costs from YouWin!:

Wood

Brass ornamentation

Engraving materials

Adhesive for trophy production

Salary of sales staff

Wages of machine operators

Wages of factory custodial staff

Production managerâs salary

Rent and insurance of factory building

Rent on headquarters building

Engraving machine

Electricity for factory building

Depreciation of office equipment

Maintenance on engraving machines

For each cost listed fill in the following chart. If a definitedistinction cannot be made for any category, indicate why and whatadditional information would be needed before classification can bemade.

Item	Product or Period	Direct or Indirect	Variable, Fixed orMixed	Controllable orUncontrollable (from view of Production Manager)

4. Gladnish Manufacturing Company operates two shifts ofworkers. Day workers are paid $12 per hour; evening workers arepaid a shift premium of 20%. Overtime premiums are 50% above day orevening wages. For August 2009 the following factory payrollinformation is available:

Total hours worked during the month (70% by day, 30% byevening): 18,000 hours

Overtime hours worked during the month (only by day workers):1,000

What were the total wages paid to employees during themonth?

Of the amount paid in Part A, how much would be considereddirect labor cost?

Of the indirect labor cost, how much is for shift premiums andhow much is for overtime premiums?

crimsonprairie-dog985

ACTG 2P12 Chapter Notes - Chapter 15: Operating Leverage, Fixed Cost, Earnings Before Interest And Taxes

Document Summary

Get access

Related Documents

ACTG 2P12 Chapter Notes - Chapter 8: Total Absorption Costing, Finished Good

ACCT 210 Study Guide - Midterm Guide: Contribution Margin, Total Absorption Costing, Net Income

COMMERCE 2AB3 Lecture Notes - Opportunity Cost, Bookkeeping, Outsourcing

Related Questions