Managerial Accounting
15th Edition
ISBN: 9781337912020
Author: Carl Warren, Ph.d. Cma William B. Tayler
Publisher: South-Western College Pub
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Chapter 6, Problem 25E
A.
To determine
Calculate the operating leverage for BE Incorporation and BR Incorporation.
B.
To determine
Calculate the increase in income from operations for Be Incorporation and Br Incorporation with the increase in sales of 20%.
C.
To determine
Explain the difference in the increase in income from operations for the two companies.
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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.
Which of the following is true regarding the contribution margin ratio of a single product company?
As fixed expenses decrease, the contribution margin ratio increases.
The contribution margin ratio multiplied by the variable expense per unit equals the contribution margin per unit.
The contribution margin ratio increases as the number of units sold increases.
If sales increase, the dollar increase in net operating income can be computed by multiplying the contribution margin ratio by the dollar increase in sales.
Which of the following is true regarding the contribution margin ratio of asingle product company?
a. As fixed expenses decrease, the contribution margin ratio increases
b. The contribution margin ratio increases as the number of units sold increase
c. The contribution margin ratio multiplied by the variable expense per unit equals thecontribution margin per unit
d. If sales increase, the peso increase in net operating income can be computed bymultiplying the contribution margin ratio by the peso increase in sales
Chapter 6 Solutions
Managerial Accounting
Ch. 6 - Describe how total variable costs and unit...Ch. 6 - Which of the following costs would be classified...Ch. 6 - Describe how total fixed costs and unit fixed...Ch. 6 - Prob. 4DQCh. 6 - Prob. 5DQCh. 6 - Prob. 6DQCh. 6 - Prob. 7DQCh. 6 - Prob. 8DQCh. 6 - Prob. 9DQCh. 6 - What does operating leverage measure, and how is...
Ch. 6 - High-low method The manufacturing costs of...Ch. 6 - Contribution margin Waite Company sells 250,000...Ch. 6 - Prob. 3BECh. 6 - Prob. 4BECh. 6 - Prob. 5BECh. 6 - Operating leverage Haywood Co. reports the...Ch. 6 - Margin of safety Jorgensen Company has sales of...Ch. 6 - Classify Costs Following is a list of various...Ch. 6 - Identify cost graphs The following cost graphs...Ch. 6 - Identify activity bases For a major university,...Ch. 6 - Prob. 4ECh. 6 - Identify fixed and variable costs Intuit Inc....Ch. 6 - Relevant range and fixed and variable costs Child...Ch. 6 - High-low method Ziegler Inc. has decided to use...Ch. 6 - Prob. 8ECh. 6 - Contribution margin ratio Young Company budgets...Ch. 6 - Contribution margin and contribution margin ratio...Ch. 6 - Prob. 11ECh. 6 - Break-even sales Anheuser-Busch InBev SA/NV (BUD)...Ch. 6 - Prob. 13ECh. 6 - Prob. 14ECh. 6 - Prob. 15ECh. 6 - Break-even analysis for a service company3 Sprint...Ch. 6 - Prob. 17ECh. 6 - Prob. 18ECh. 6 - Prob. 19ECh. 6 - Prob. 20ECh. 6 - Prob. 21ECh. 6 - Prob. 22ECh. 6 - Prob. 23ECh. 6 - Prob. 24ECh. 6 - Prob. 25ECh. 6 - Classify costs Seymour Clothing Co. manufactures a...Ch. 6 - Break-even sales under present and proposed...Ch. 6 - Prob. 3PACh. 6 - Prob. 4PACh. 6 - Prob. 5PACh. 6 - Contribution margin, break-even sales,...Ch. 6 - Classify costs Cromwell Furniture Company...Ch. 6 - Prob. 2PBCh. 6 - Prob. 3PBCh. 6 - Prob. 4PBCh. 6 - Prob. 5PBCh. 6 - Contribution margin, break-even sales,...Ch. 6 - Analyze Global Airs cost-volume-profit...Ch. 6 - Prob. 2MADCh. 6 - Prob. 3MADCh. 6 - Prob. 4MADCh. 6 - Prob. 1TIFCh. 6 - Prob. 3TIFCh. 6 - Profitability strategies Somerset Inc. has...Ch. 6 - Prob. 5TIFCh. 6 - Analysis of costs for a shipping department Sales...Ch. 6 - Taylor Corporation is analyzing the cost behavior...Ch. 6 - Prob. 2CMACh. 6 - Bolger and Co. manufactures large gaskets for the...Ch. 6 - Prob. 4CMA
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- 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 Quintexs profits is so much greater than that of Trimax.arrow_forwardHow many statements below about operating leverage are correct? 1. Operating leverage measures the sensitivity of a firm's operating income to changes in the firm's level of sales. 2. Automated operations results to greater operating leverage for the firm than mechanical operations. 3. An operațing leverage of 5 means that a firm's operating income will increase by P0.5 for every P1 increase in sales. 4. Operating leverage will decrease as the firm's margin of safety increases. 5. The higher the firm's operating leverage, the higher is its income potential but at the same time, the higher the risk of incurring loss. 1 2 4arrow_forwardThe activity ratios measure which of the following? Select one: O a the efficiency of the company's supply chain O b. the efficiency with which a company generates sales from its assets Oc the profitability of the company's activities Od the production efficiency of a company's fixed assets If the assumption of financial distress costs is added, then Modigliani and Miller (with taxes) predicts that the optimal capital structure is 100% debt Select one: O True O Falsearrow_forward
- Tom Company reports the following data: Sales Variable costs Fixed costs Determine Tom Company's operating leverage. Round your answer to one decimal place. $156,332 81,532 30,800arrow_forwardAlternative measures of Profit: Calculate the accounting profit or loss as well as the economic profit or loss in each of the following situations: A firm with total revenues of $150 million, explicit costs of $90 million, and implicit costs of $40 million. A firm with total revenues of $125 million, explicit costs of $100 million, and implicit costs of $30 million. A firm with total revenues of $100 million, explicit costs of $90 million, and implicit costs of $20 million. A firm with total revenues of $250,000, explicit costs of $275,000, and implicit costs of $50,000arrow_forwardUse the following information about Rat Race Home Security, Inc. to answer the questions: Average selling price per unit $324. Variable cost per unit $187 Units sold 449 Fixed costs $8,589 Interest expense 17,204 Based on the data above, what will be the resulting percentage change in earnings per share of Rat Race Home Security, Inc. if they expect operating profit to change 4.2 percent? (You should calculate the degree of financial leverage first). (Write the percentage sign in the "units" box).arrow_forward
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