Accounting: What the Numbers Mean
11th Edition
ISBN: 9781259535314
Author: David Marshall, Wayne William McManus, Daniel Viele
Publisher: McGraw-Hill Education
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Textbook Question
Chapter 12, Problem 12.32C
Case 12.32
LO 12
Understanding the effects of operating leverage HighTech, Inc., and OldTime Co. compete within the same industry and had the following operating results in 2015:
| HighTech, |
Inc.
Co.
Required:
- Calculate the break-even point for each firm in terms of revenue.
- What observations can you draw by examining the break-even point of each firm given that they earned an equal amount of operating income on identical sales volumes in 2015?
- Calculate the amount of operating income (or loss) that you would expect each firm to report in 2016 if sales were to
- Increase by 20%.
- Decrease by 20%.
- Using the amounts computed in requirement c, calculate the increase or decrease in the amount of operating income expected in 2016 from the amount reported in 2015.
- Explain why an equal percentage increase (or decrease) in sales for each firm would have such differing effects on operating income.
- Calculate the ratio of contribution margin to operating income for each firm in 2015. (Hint: Divide contribution margin by operating income.)
- Multiply the expected increase in sales of 20% for 2016 by the ratio of contribution margin to operating income for 2015 computed in requirement f for each firm. (Hint: Multiply your answer in requirement f by 0.2.)
- Multiply your answer in requirement g by the operating income of $210,000 reported in 2015 for each firm.
- Compare your answer in requirement h with your answer in requirement d. What conclusions can you draw about the effects of operating leverage from the steps you performed in requirements f, g, and h?
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The Foundational 15 (Static) [LO10-1, LO10-2]
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[The following information applies to the questions displayed below.]
Westerville Company reported the following results from last year’s operations:
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$ 1,000,000
Variable expenses
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Contribution margin
700,000
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At the beginning of this year, the company has a $120,000 investment opportunity with the following cost and revenue characteristics:
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14. If Westerville’s chief executive officer will earn a bonus only if her residual income from this year exceeds her residual income from last year, would she pursue the investment opportunity?
multiple choice
Yes
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Q # 12
The accounting firm of Smith and Thompson has been studying the sales requirements of the Frisco Bottling Company. In the course of the study, the managing partner submits the following estimated data:
Sales
$900,000
Fixed marketing expenses
$71,000
Direct materials
206,200
Variable marketing expenses
80,000
Direct Labor
165,200
Fixed administrative expenses
9,500
FOH
171,896
Variable administrative expenses
4,000
Variable FOH
102,600
Required:
Break-even point in dollars
Margin of Safety
Rate of Margin of Safety
Required information
The Foundational 15 (Static) [LO10-1, LO10-2]
Skip to question
[The following information applies to the questions displayed below.]
Westerville Company reported the following results from last year’s operations:
Sales
$ 1,000,000
Variable expenses
300,000
Contribution margin
700,000
Fixed expenses
500,000
Net operating income
$ 200,000
Average operating assets
$ 625,000
At the beginning of this year, the company has a $120,000 investment opportunity with the following cost and revenue characteristics:
Sales
$ 200,000
Contribution margin ratio
60
% of sales
Fixed expenses
$ 90,000
The company’s minimum required rate of return is 15%.
Foundational 10-12 (Static)
12. What is the residual income of this year’s investment opportunity?
Chapter 12 Solutions
Accounting: What the Numbers Mean
Ch. 12 - Prob. 12.1MECh. 12 - Prob. 12.2MECh. 12 - Prob. 12.3MECh. 12 - Prob. 12.4MECh. 12 - Prob. 12.5MECh. 12 - Prob. 12.6MECh. 12 - Exercise 12.7 LO 3 Cost classifications For each...Ch. 12 - Exercise 12.8 LO 3 Cost classifications For each...Ch. 12 - Prob. 12.9ECh. 12 - Prob. 12.10E
Ch. 12 - Prob. 12.11ECh. 12 - Prob. 12.12ECh. 12 - Prob. 12.13ECh. 12 - Prob. 12.14ECh. 12 - Exercise 12.15
LO 8, 9
Special promotion—effects...Ch. 12 - Prob. 12.16ECh. 12 - Problem 12.17 LO 6 High-low method A department of...Ch. 12 - Problem 12.18
LO 6
High-low method—missing amounts...Ch. 12 - Prob. 12.19PCh. 12 - Prob. 12.20PCh. 12 - Prob. 12.21PCh. 12 - Prob. 12.22PCh. 12 - Prob. 12.23PCh. 12 - Prob. 12.24PCh. 12 - Prob. 12.25PCh. 12 - Problem 12.26 LO 8. 9, 10, 11 CYP...Ch. 12 - Prob. 12.27PCh. 12 - Prob. 12.28PCh. 12 - Prob. 12.29CCh. 12 - Prob. 12.30CCh. 12 - Prob. 12.31CCh. 12 - Case 12.32 LO 12 Understanding the effects of...Ch. 12 - Prob. 12.33C
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