Maurice Tutor

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Teaching Since: May 2017
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  • MCS,PHD
    Argosy University/ Phoniex University/
    Nov-2005 - Oct-2011

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  • Professor
    Phoniex University
    Oct-2001 - Nov-2016

Category > Management Posted 21 Nov 2017 My Price 9.00

lemonade concession cart

The Problem

You own and manage a pretzel and lemonade concession cart. You decide that you want to sell your products at a NASCARA?® race weekend in Loudon, NH. The racetrack owners let you choose one of the following rental Ac€A?optionsAc€??:

Low Ac€A?OverheadAc€?? Rent - Ac€A?CommissionAc€?? of 30% of total sales

High Ac€A?OverheadAc€?? Rent - $1,000 fixed rental cost for the entire weekend

Your food and beverage costs are 20% of total sales. You also have to pay an employee $400 to run the cart over the weekend.

Question 1 Ac€?o Find Breakeven

For each scenario, calculate at what level of sales where you will reach the breakeven point.

Question 2 Ac€?o Calculate Degree of Operating Leverage

You estimate that your sales for the weekend will either be Ac€A?averageAc€?? or Ac€A?greatAc€??:

Average: $2,800 in sales

Great: 50% higher than Ac€A?averageAc€?? or $4,200

What is your degree of leverage at AVERAGE sales of $2,800 for both the low and high overhead scenario?

Operating Leverage =         Sales Ac€?o Total Variable Cost         

                                    Sales Ac€?o Total Cost (Fixed and Variable)

Question 3 Ac€?o Calculate Profits and Increase In Profitability

Calculate the profit potential for an average and great weekend for both the low overhead scenario and the high overhead scenario.

How much did profits increase by relative to an increase in sales for both scenarios?

How does this compare with the answers you derived in question 2?

Conclusion

Companies with a higher fixed overhead (and hence, lower variable costs relative to fixed costs) must reach a higher level of sales prior to becoming profitable. However, they will enjoy a greater increase in profits as sales increase.

 

High Operating Leverage

Low Operating Leverage

Breakeven

Higher

Lower

Increase In Profits

Faster

Slower

 

Answers

Maurice Tutor
(5)
Status NEW Posted 21 Nov 2017 05:11 PM My Price 9.00

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