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HighTech, Inc., and OldTime Co. compete within the same industry and had the following operating results in 2010: HighTech, Inc. OldTime Co. Sales $ 2,100,000
HighTech, Inc., and OldTime Co. compete within the same industry and had the following operating results in 2010: HighTech, Inc. OldTime Co. Sales $ 2,100,000 $ 2,100,000 Variable expenses 420,000 1,260,000 ________________________________________ ________________________________________ ________________________________________ ________________________________________ ________________________________________ ________________________________________ Contribution margin $ 1,680,000 $ 840,000 Fixed expenses 1,470,000 630,000 ________________________________________ ________________________________________ ________________________________________ ________________________________________ ________________________________________ ________________________________________ Operating income $ 210,000 $ 210,000 ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________ Requirement 1: Calculate the break-even point for each firm in terms of revenue. (Omit the "$" sign in your response.) Breakeven sales revenue HighTech, Inc. $ OldTime Co. $ ________________________________________ Requirement 2: 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 2010? Requirement 3: (a) Calculate the amount of operating income (or loss) that you would expect each firm to report in 2011 if sales were to increase by 20%. (Omit the "$" sign in your response.) Operating income (or loss) HighTech, Inc. $ OldTime Co. $ ________________________________________ (b) Calculate the amount of operating income (or loss) that you would expect each firm to report in 2011 if sales were to decrease by 20%. (Negative amount should be indicated by a minus sign. Omit the "$" sign in your response.) Operating income (or loss) HighTech, Inc. $ OldTime Co. $ ________________________________________ Requirement 4: Using the amounts computed in requirement 3 above, calculate the increase or decrease in the amount of operating income expected in 2011 from the amount reported in 2010. (Input all amounts as positive values. Omit the "$" sign in your response.) HighTech, Inc OldTime Co. Expected increase in operating income $ $ Expected decrease in operating income $ $ ________________________________________ Requirement 5: Explain why an equal percentage increase (or decrease) in sales for each firm would have such differing effects on operating income. Requirement 6: Calculate the ratio of contribution margin to operating income for each firm in 2010. (Hint: Divide contribution margin by operating income.) Ratio of contribution margin HighTech, Inc times OldTime Co. times ________________________________________ Requirement 7: Multiply the expected increase in sales of 20% for 2011 by the ratio of contribution margin to operating income for 2010 computed in requirement 6 for each firm. (Hint: Multiply your answer in requirement 6 by 0.2.) (Omit the "%" sign in your response.) HighTech, Inc % OldTime Co. % ________________________________________ Requirement 8: Multiply your answer in requirement 7 by the operating income of $210,000 reported in 2010 for each firm.. (Omit the "$" sign in your response.) HighTech, Inc. $ OldTime Co. $ ________________________________________ Requirement 9: Compare your answer in requirement 8 with your answer in requirement 4. What conclusions can you draw about the effects of operating leverage from the steps you performed in requirements 6, 7, and 8
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