Calculate breakeven, operating leverage and changes in profitability.

The Power of Operating Leverage

The Problem

You own and manage a pretzel and lemonade concession cart. You decide that you want to sell your products at a NASCAR race weekend in Loudon, NH. The racetrack owners let you choose one of the following rental "options":

• Low "Overhead" Rent- "Commission" of 30% of total sales
• High "Overhead" Rent- $1,000 fixed rental cost for the entire weekend

Your food and beverage costs are 20% of total sales. You also have to pay an employee $400 to run the cart over the weekend.

Question 1 - Find Breakeven

For each scenario, calculate at what level of sales where you will reach the breakeven point.

Question 2 - Calculate Degree of Operating Leverage

You estimate that your sales for the weekend will either be "average" or "great":

• Average: $2,800 in sales
• Great: 50% higher than "average" or $4,200

What is your degree of leverage at AVERAGE sales of $2,800 for both the low and high overhead scenario?

Operating Leverage = Sales - Total Variable Cost

Sales - Total Cost (Fixed and Variable)

Question 3 - Calculate Profits and Increase In Profitability

Calculate the profit potential for an average and great weekend for both the low overhead scenario and the high overhead scenario.

How much did profits increase by relative to an increase in sales for both scenarios?

How does this compare with the answers you derived in question 2?

A B C D E F G H W NP 5 6 Low High FC 8 Variable 9 10 Breakeven Sales 11 12 13 14 15 0 #DIV/O! 0 0 #DIV/O! 16 17 18 19 HOFAbove ooo 0 0 20 21 0 0 0 22 0 0 0 24 25 Profits grew by how much faster than sales?: #DIV/O! X #DIV/O! X 26 27 28 29 30 31