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Case 1 2 - 3 4 ( Algo ) Understanding the effects of operating leverage LO 1 2 - 1 2 HighTech Incorporated and OldTime
Case Algo Understanding the effects of operating leverage LO
HighTech Incorporated and OldTime Company compete within the same industry and had the following operating results in :
Required:
a Calculate the breakeven point for each firm in terms of revenue.
b What observations can you draw by examining the breakeven point of each firm given that they earned an equal amount of
operating income on identical sales volumes in
c Calculate the amount of operating income or loss that you would expect each firm to report in if sales were to
Increase by
Decrease by
d Using the amounts computed in requirement c calculate the increase or decrease in the amount of operating income expected in
from the amount reported in
e Explain why an equal percentage increase or decrease in sales for each firm would have such differing effects on operating
income.
f Calculate the ratio of contribution margin to operating income for each firm in Hint: Divide contribution margin by operating
income.
g Multiply the expected increase in sales of for by the ratio of contribution margin to operating income for compute
in requirement for each firm. Hint: Multiply your answer in requirement f by
h Multiply your answer in requirement by the operating income of $ reported in for each firm.
i Compare your answer in requirement with your answer in requirement What conclusions can you draw about the effects of
operating leverage from the steps you performed in requirements and
Calculate the amount of operating income or loss that you would expect each firm to report in if sales were to increase
by
Note: Losses should be indicated by minus sign. Calculate the amount of operating income or loss that you would expect each firm to report in if sales were to
decrease by
Note: Losses should be indicated by minus sign. Using the amounts computed in requirement c calculate the increase or decrease in the amount of operating income
expected in from the amount reported in Multiply the expected increase in sales of for by the ratio of contribution margin to operating income for
computed in requirement for each firm. Hint: Multiply your answer in requirement by
Note: Do not round intermediate calculations and round your final answers to decimal places.Multiply your answer in requirement by the operating income of $ reported in for each firm.
Note: Do not round intermediate calculations.
HighTech Incorporated
OldTime Company
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