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Posted: July 12th, 2023
Compare the two companies in the Degree of Leverage
Question description
Assume that two companies, Brake, Inc. and Carbo, Inc., have
the following operating results:
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Brake,
Inc.
Carbo,
Inc.
Sales
$300,000
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$300,000
Variable Costs
60,000
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180,000
Fixed Costs
210,000
90,000
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Operating Income
$30,000
$30,000
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?
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