Compare the two companies in the Degree of Leverage
Question description
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Assume that two companies, Brake, Inc. and Carbo, Inc., have the following operating results:
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Brake, Inc.
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Carbo, Inc.
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Sales
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$300,000
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$300,000
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Variable Costs
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60,000
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180,000
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Fixed Costs
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210,000
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90,000
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Operating Income
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$30,000
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$30,000
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Required:
- Calculate the contribution margins for the two companies.
Contribution margin = (Revenues – Variable expenses) / Revenues
Brake, Inc: ($300,000 - $60,000) / $300,000 = $240,000 / $300,000 = 80%
Carbo, Inc.: ($300,000 - $180,000) / $300,000 = 40%
- Calculate the break-even point for each firm, in dollars and in units.
Break-even point per unit = Fixed expenses / (Price - Variable expenses)
Brake, Inc.:
Carbo, Inc.:
- Compare the two companies. What conclusions could you make regarding the use of operating leverage employed by the two firms?
- Assume that both companies experience an increase in sales by 15% next year. What would be the operating income for each firm net year? Explain the difference in the change in operating income between the two companies.
- Based on the information from the above questions, what recommendations would you make to the two companies and why?
Answers
Status NEW
Posted 14 Jun 2017 06:06 AM
My Price 6.00
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