Cornerstones of Cost Management (Cornerstones Series)
4th Edition
ISBN: 9781305970663
Author: Don R. Hansen, Maryanne M. Mowen
Publisher: Cengage Learning
expand_more
expand_more
format_list_bulleted
Textbook Question
thumb_up100%
Chapter 16, Problem 21E
Income statements for two different companies in the same industry are as follows:
Required:
- 1. Compute the degree of operating leverage for each company.
- 2. Compute the break-even point for each company. Explain why the break-even point for Quintex, Inc., is higher.
- 3. Suppose that both companies experience a 50 percent increase in revenues. Compute the percentage change in profits for each company. Explain why the percentage increase in Quintex’s profits is so much greater than that of Trimax.
Expert Solution & Answer
Trending nowThis is a popular solution!
Students have asked these similar questions
Income statements for two different companies in the same industry are as follows:
Required:1. Compute the degree of operating leverage for each company.2. CONCEPTUAL CONNECTION Compute the break-even point in dollars for eachcompany. Explain why the break-even point for Macduff is higher.3. CONCEPTUAL CONNECTION Suppose that both companies experience a 30% increasein revenues. Compute the percentage change in profits for each company. Explain why thepercentage increase in Macduff ’s profits is so much larger than that of Duncan.
MAC Corp.'s sales last year were $435,000, its operating costs were $362,500, its operating income (EBIT) was $72,500 and its interest charges were $12,500. What was the firm's times interest earned (TIE) ratio? Please show work for understanding the calculation.
Explain why the TIE ratio is important and what can the firm do to improve its TIE ratio.
Consider two firms – Alpha Co. and Omega Co. – that operate in the manufacturing of mountain bikes and have the same degree of operating leverage. Alpha Co. and Omega Co. have, respectively, no debt and 50 percent debt in their capital structure. Which of the following statements is most accurate? Compared to the Alpha Co., the Omega Co. has:
a. the same sensitivity of net income to changes in operating income.
b. a lower sensitivity of net income to changes in unit sales.
c. the same sensitivity of operating income to changes in unit sales.
Chapter 16 Solutions
Cornerstones of Cost Management (Cornerstones Series)
Ch. 16 - Prob. 1DQCh. 16 - Describe the difference between the units-sold...Ch. 16 - Define the term break-even point.Ch. 16 - Explain why contribution margin per unit becomes...Ch. 16 - A restaurant owner who had yet to earn a monthly...Ch. 16 - What is the variable cost ratio? The contribution...Ch. 16 - Prob. 7DQCh. 16 - Suppose a firm with a contribution margin ratio of...Ch. 16 - Prob. 9DQCh. 16 - Explain how CVP analysis developed for single...
Ch. 16 - Prob. 11DQCh. 16 - How do income taxes affect the break-even point...Ch. 16 - Explain how a change in sales mix can change a...Ch. 16 - Explain how a change in sales mix can change a...Ch. 16 - Prob. 15DQCh. 16 - Prob. 1CECh. 16 - Prob. 2CECh. 16 - Health-Temp Company is a placement agency for...Ch. 16 - Olivian Company wants to earn 420,000 in net...Ch. 16 - Vandenberg, Inc., produces and sells two products:...Ch. 16 - Prob. 6CECh. 16 - Prob. 7CECh. 16 - Prob. 8ECh. 16 - Gelbart Company manufactures gas grills. Fixed...Ch. 16 - Schylar Pharmaceuticals, Inc., plans to sell...Ch. 16 - Prob. 11ECh. 16 - Prob. 12ECh. 16 - Big Red Motors, Inc., employs 15 sales personnel...Ch. 16 - Sports-Reps, Inc., represents professional...Ch. 16 - Campbell Company manufactures and sells adjustable...Ch. 16 - Prob. 16ECh. 16 - Sara Pacheco is a sophomore in college and earns a...Ch. 16 - Carmichael Corporation is in the process of...Ch. 16 - Choose the best answer for each of the following...Ch. 16 - Prob. 20ECh. 16 - Income statements for two different companies in...Ch. 16 - Prob. 22ECh. 16 - Prob. 23ECh. 16 - Busy-Bee Baking Company produces a variety of...Ch. 16 - Prob. 25ECh. 16 - Jester Company had unit contribution margin on...Ch. 16 - Loessing Company produced and sold 12,000 units...Ch. 16 - Junior Company has a breakeven point of 34,600...Ch. 16 - Prob. 29ECh. 16 - If a companys variable cost per unit increases,...Ch. 16 - Prob. 31PCh. 16 - More-Power Company has projected sales of 75,000...Ch. 16 - Consider the following information on four...Ch. 16 - Hammond Company runs a driving range and golf...Ch. 16 - Prob. 35PCh. 16 - Faldo Company produces a single product. The...Ch. 16 - Katayama Company produces a variety of products....Ch. 16 - Prob. 38PCh. 16 - Prob. 39PCh. 16 - Prob. 40PCh. 16 - Salem Electronics currently produces two products:...Ch. 16 - Good Scent, Inc., produces two colognes: Rose and...
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, accounting and related others by exploring similar questions and additional content below.Similar questions
- Suppose you are analyzing a firm that is successfully executing a strategy that differentiates its products from those of its competitors. Because of this strategy, you project that next year the firm will generate 6.0% revenue growth from price increases and 3.0% revenue growth from sales volume increases. Assume that the firms production cost structure involves strictly variable costs. (That is, the cost to produce each unit of product remains the same.) Should you project that the firms gross profit will increase next year? If you project that the gross profit will increase, is the increase a result of volume growth, price growth, or both? Should you project that the firms gross profit margin (gross profit divided by sales) will increase next year? If you project that the gross profit margin will increase, is the increase a result of volume growth, price growth, or both?arrow_forwardIf a firm has a contribution margin of $59,690 and a net income of $12,700 for the current month, what is their degree of operating leverage? A. 0.18 B. 1.18 C. 2.4 D. 4.7arrow_forwardThe Carioco Company has two divisions that operate independently of one another. The financial data for the year 2022 reported the following results: Alpha Beta Sales $3,000,000 $2,500,000 Operating income 750,000 550,000 Taxable income 650,000 375,000 Investment 6,000,000 5,000,000 The company's desired rate of return is 10%. Income is defined as operating income. Required: What are the respective return-on-investment ratios for the Alpha and Beta Divisions? a. 0.110 and 0.125 b. 0.125 and 0.110 c. 0.050 and 0.150 d. 0.108 and 0.075arrow_forward
- The statement of comprehensive income of Blanche Company for the current year is presented below (refer to the attached picture): What is the degree of operating leverage of Blanche Company? sales 400,000 variable costs 125,000 contribution margin 275,000 fixed cost 200,000 income before tax 75,000arrow_forwardBased on the facts of Easy Problems Corp. At the present average monthly sales level of 11,000 units, the corporation's operating leverage factor (OLF) isarrow_forwardA company has a required return of 12%, a profit margin of 4%, a D/E ratio of 0.5 and total asset turnover of 2. Annual dividends last year were $2.00. A) The company has a dividend payout ratio of 20%; calculate the price and forward P/E ratio. B) If the company would have changed its dividend payout ratio to 60%, what would happen to the price and forward P/E ratio? C) What variables are critical to determine if they should increase or decrease their dividend payout ratio? (Hint be specific what variables do you need to know.)arrow_forward
- Two companies are in the retail sales business, but their performance results are different, which is evidenced by the following data: Financial performance ratio Return on capital employed (ROCE) Return on ordinary share financing (ROSF) 30% Average debt collection period Average debt payment period Gross profit margin Net profit margin Average stock turnover period 20% 63 days 50 days 40% 10% 52 days Comp A Company B 17% 18% 21 days 45 days 15% 10% 25 days Perform the analysis of these data and describe the differences between these two companies. It is known that in one of them the work with consumers is well organised, while the other one is offering competitive prices. Which of these advantages are attributable to each company?arrow_forwardThe most recent financial statements for Mandy Company are shown here: Income Statement Balance Sheet Sales $ 16,400 Current assets $ 11,200 Debt $ 13,600 Costs 11,200 Fixed assets 24,300 Equity 21,900 Taxable income $ 5,200 Total $ 35,500 Total $ 35,500 Taxes (21%) 1,092 Net income $ 4,108 Assets and costs are proportional to sales. Debt and equity are not. The company maintains a constant 30 percent dividend payout ratio. What is the sustainable growth rate?arrow_forwardWagner Industrial Motors, which is currently operating at full capacity, has sales of $2,340, current assets of $680, current liabilities of $370, net fixed assets of $1,530, and a 5 percent profit margin. The firm has no long-term debt and does not plan on acquiring any. The firm does not pay any dividends. Sales are expected to increase by 10 percent next year. If all assets, short-term liabilities, and costs vary directly with sales, how much additional equity financing is required for next year? $172.30 $245.70 $234.00 $55.30 $11.70arrow_forward
- Solano Company has sales of $620,000, cost of goods sold of $430,000, other operating expenses of $51,000, average invested assets of $1,900,000, and a hurdle rate of 10 percent.Required:1. Determine Solano’s return on investment (ROI), investment turnover, profit margin, and residual income.2. Several possible changes that Solano could face in the upcoming year follow. Determine each scenario’s impact on Solano’s ROI and residual income. (Note: Treat each scenario independently.)a. Company sales and cost of goods sold increase by 30 percent.b. Operating expenses decrease by $15,500.c. Operating expenses increase by 10 percent.arrow_forwardA service company has the following financial information (in millions of $)a. What is the profit leverage effect of reducing the cost of the facilitating goods in this company?b. It has been suggested that the in-house services costs could be reduced by 10 percent in the coming year by implementing lean systems. What effect would thisohave on earnings increase in percentage?c. What is the profit leverage effect of in-house services relative to profits?arrow_forwardConsider the following simplified financial statements for the Wims Corporation (assuming no income taxes): Income Statement Balance Sheet Sales $23,000 Assets $10,900 Debt $4,400 Costs 13,900 Equity 6,500 Net income $9,100 Total $10,900 Total $10,900 The company has predicted a sales increase of 10 percent. It has predicted that every item on the balance sheet will increase by 10 percent as well. Create the pro forma statements and reconcile them. What is the plug variable here?arrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
- Cornerstones of Cost Management (Cornerstones Ser...AccountingISBN:9781305970663Author:Don R. Hansen, Maryanne M. MowenPublisher:Cengage LearningManagerial Accounting: The Cornerstone of Busines...AccountingISBN:9781337115773Author:Maryanne M. Mowen, Don R. Hansen, Dan L. HeitgerPublisher:Cengage LearningManagerial AccountingAccountingISBN:9781337912020Author:Carl Warren, Ph.d. Cma William B. TaylerPublisher:South-Western College Pub
- Financial Reporting, Financial Statement Analysis...FinanceISBN:9781285190907Author:James M. Wahlen, Stephen P. Baginski, Mark BradshawPublisher:Cengage LearningEBK CONTEMPORARY FINANCIAL MANAGEMENTFinanceISBN:9781337514835Author:MOYERPublisher:CENGAGE LEARNING - CONSIGNMENTIntermediate Financial Management (MindTap Course...FinanceISBN:9781337395083Author:Eugene F. Brigham, Phillip R. DavesPublisher:Cengage Learning
Cornerstones of Cost Management (Cornerstones Ser...
Accounting
ISBN:9781305970663
Author:Don R. Hansen, Maryanne M. Mowen
Publisher:Cengage Learning
Managerial Accounting: The Cornerstone of Busines...
Accounting
ISBN:9781337115773
Author:Maryanne M. Mowen, Don R. Hansen, Dan L. Heitger
Publisher:Cengage Learning
Managerial Accounting
Accounting
ISBN:9781337912020
Author:Carl Warren, Ph.d. Cma William B. Tayler
Publisher:South-Western College Pub
Financial Reporting, Financial Statement Analysis...
Finance
ISBN:9781285190907
Author:James M. Wahlen, Stephen P. Baginski, Mark Bradshaw
Publisher:Cengage Learning
EBK CONTEMPORARY FINANCIAL MANAGEMENT
Finance
ISBN:9781337514835
Author:MOYER
Publisher:CENGAGE LEARNING - CONSIGNMENT
Intermediate Financial Management (MindTap Course...
Finance
ISBN:9781337395083
Author:Eugene F. Brigham, Phillip R. Daves
Publisher:Cengage Learning
How To Analyze an Income Statement; Author: Daniel Pronk;https://www.youtube.com/watch?v=uVHGgSXtQmE;License: Standard Youtube License