4. Undertake a sensitivity analysis assessing the impact of operating leverage on net income based on the following two what-if scenarios for both the divisions. (Use appropriate formula and format the cells as 'currency'): a) Conservative scenario: What would be the projected net income (loss) if sales decrease by 40% in the fourth quarter? b) Optimistic scenario: What would be the projected net income (loss) if sales increase by 40% in the fourth quarter? 5. Assume that you are in the position of Cost Accountant in Fitness Fast Inc. Management seeks clarification from you on the notable differences in breakeven units between the two divisions, despite both divisions reporting identical total sales and net income for the period. Additionally, They are keen to understand the reasons behind the substantial disparities in the comparative data of the sensitivity analysis for the two divisions. Explain the reasons for such differences to management. (Write your answer in the Explanation box.) A DO NOT MAKE CHANGES TO ANY LABELS OR TEXT BELOW. ANY CHANGES MADE WILL RESULT IN A LOSS OF POINTS. 1 Product: Complan Revenue per unit 2 Total Variable Costs of Goods Sold Total Fixed Costs of Goods Sold Total Variable Selling and Administration Expenses ASSUMPTIONS Total Fixed Selling and Administration Expenses Quarterly volume of units sold in the fourth quarter 20Y3 Denver $30 Santa Fe $30 $900,000 $2,520,000 $1,650,000 $0 $150,000 $200,000 $320,000 $300,000 200,000 200,000 Projected Contribution Margin based Income Statement For Fourth quarter 2012 Sales Total Variable costs Contribution margin Total Fixed costs Net income 3 Calculate the followings: Variable Cost per unit Contribution Margin per unit Break Even units (use Roundup formula) Break Even sales (Break even units x Selling price per unit) Margin of Safety percentage Operating Leverage 4 Calculate the net income under the Conservative and Optimistic scenarios: Sensitivity Analyis Denver $ Santa Fe $ An $6,000,000 $6,000,000 Cor $1,050,000 $2,720,000 Cor $4,950,000 $3,280,000 Cor $1,970,000 $300,000 Cor $2,980,000 $2,980,000 Cor Denver $5.25 $24.75 79,596.00 $2,387,880 60.20% 1.66 Santa Fe $13.60 Corr $16.40 Corr 18,293.00 Corre $548,790 Corre 90.85% Corre 1.10 Corre Denver Santa Fe 2 Conservative scenario: Sales decrease by 40% than the projected sales -40% -40% 4 Net Income under conservative scenario: 5 6 Optimistic scenario: Sales increase by 40% than the projected sales 40% 40% 7 38 Net Income under optimistic scenario: 89 40 5 Write your answer to Question 5 in Explanation box below: 41 42 Explanation: 48 44 45 46 47 48 49 50 51

4. Undertake a sensitivity analysis assessing the impact of operating leverage on net income based on the following two what-if scenarios for both the divisions. (Use appropriate formula and format the cells as 'currency'): a) Conservative scenario: What would be the projected net income (loss) if sales decrease by 40% in the fourth quarter? b) Optimistic scenario: What would be the projected net income (loss) if sales increase by 40% in the fourth quarter? 5. Assume that you are in the position of Cost Accountant in Fitness Fast Inc. Management seeks clarification from you on the notable differences in breakeven units between the two divisions, despite both divisions reporting identical total sales and net income for the period. Additionally, They are keen to understand the reasons behind the substantial disparities in the comparative data of the sensitivity analysis for the two divisions. Explain the reasons for such differences to management. (Write your answer in the Explanation box.) A DO NOT MAKE CHANGES TO ANY LABELS OR TEXT BELOW. ANY CHANGES MADE WILL RESULT IN A LOSS OF POINTS. 1 Product: Complan Revenue per unit 2 Total Variable Costs of Goods Sold Total Fixed Costs of Goods Sold Total Variable Selling and Administration Expenses ASSUMPTIONS Total Fixed Selling and Administration Expenses Quarterly volume of units sold in the fourth quarter 20Y3 Denver $30 Santa Fe $30 $900,000 $2,520,000 $1,650,000 $0 $150,000 $200,000 $320,000 $300,000 200,000 200,000 Projected Contribution Margin based Income Statement For Fourth quarter 2012 Sales Total Variable costs Contribution margin Total Fixed costs Net income 3 Calculate the followings: Variable Cost per unit Contribution Margin per unit Break Even units (use Roundup formula) Break Even sales (Break even units x Selling price per unit) Margin of Safety percentage Operating Leverage 4 Calculate the net income under the Conservative and Optimistic scenarios: Sensitivity Analyis Denver $ Santa Fe $ An $6,000,000 $6,000,000 Cor $1,050,000 $2,720,000 Cor $4,950,000 $3,280,000 Cor $1,970,000 $300,000 Cor $2,980,000 $2,980,000 Cor Denver $5.25 $24.75 79,596.00 $2,387,880 60.20% 1.66 Santa Fe $13.60 Corr $16.40 Corr 18,293.00 Corre $548,790 Corre 90.85% Corre 1.10 Corre Denver Santa Fe 2 Conservative scenario: Sales decrease by 40% than the projected sales -40% -40% 4 Net Income under conservative scenario: 5 6 Optimistic scenario: Sales increase by 40% than the projected sales 40% 40% 7 38 Net Income under optimistic scenario: 89 40 5 Write your answer to Question 5 in Explanation box below: 41 42 Explanation: 48 44 45 46 47 48 49 50 51

Financial Management: Theory & Practice

16th Edition

ISBN:9781337909730

Author:Brigham

Publisher:Brigham

Chapter7: Corporate Valuation And Stock Valuation

Section: Chapter Questions

Problem 11MC

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