Operating leverage: Operating leverage refers to the measurement of the degree of the variable and fixed costs used by the firm. In other words, the operating leverage refers to the reacted amount of net income of a company for the given change is sales. To Calculate: Each company’s degree of operating leverage and also determine which company’s cost structure makes it more sensitive to changes in sales volume.

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Answer 1

Question

Chapter 6, Problem 6.16E

(a)

To determine

Operating leverage:

Operating leverage refers to the measurement of the degree of the variable and fixed costs used by the firm. In other words, the operating leverage refers to the reacted amount of net income of a company for the given change is sales.

To Calculate: Each company’s degree of operating leverage and also determine which company’s cost structure makes it more sensitive to changes in sales volume.

(b)

To determine

Net Income: The net income refers to that part of income on which the profit of the company is calculated. The net income is the total earnings of the company and it is derived after subtracting all the expense and taxes from the income. The net income is calculated when total costs are deducted from the net sales revenue.

To Determine: The effects on each company’s net income if sales decreases by 15% and if sales increases by 10%.

(c)

To determine

Contribution Margin:

The process or theory, which is used to judge the benefit given by each unit of the goods produced, is called as contribution margin.

To Discuss: In which company the banker should acquire the investment.

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Atascadero Industries operates a Manufacturing Division and a Marketing Division. Both divisions are evaluated as profit centers. Marketing buys products from Manufacturing and packages them for sale. Manufacturing sells many components to third parties in addition to Marketing. Selected data from the two operations follow. Capacity (units) Sales price Variable costs Fixed costs Manufacturing 1,070,000 1,750 630 $ $ a. Transfer price b. Transfer price $10,700,000 a For Manufacturing, this is the price to third parties. b For Marketing, this does not include the transfer price paid to Manufacturing. Marketing 507,000 $ 4,900 $ 1,820 $7,270,000 Required: a. Current production levels in Manufacturing are 607,000 units. Marketing requests an additional 107,000 units to produce a special order. What transfer price would you recommend? b. Suppose Manufacturing is operating at full capacity. What transfer price would you recommend? per unit per unit

An investment banker is analyzing two companies that specialize in the production and sale of candied yams. Traditional Yams uses a labor-intensive approach, and Auto-Yams uses a mechanized system. CVP income statements for the two companies are shown below. Sales Variable costs Contribution margin Fixed costs Net income Traditional Yams $397,000 329,000 68,000 18,000 $50,000 Auto-Yams $397,000 162,000 235,000 185,000 $50,000 The investment banker is interested in acquiring one of these companies. However, she is concerned about the impact that each company's cost structure might have on its profitability.

An investment banker is analyzing two companies that specialize in the production and sale of candied yams. Sheridan Yams uses a labor-intensive approach, and Sunland Yams uses a mechanized system. CVP income statements for the two companies are shown below. Sales Variable costs Contribution margin Fixed costs Net income Sheridan Yams $394,000 310,000 84,000 34,000 $50,000 Sunland Yams $394,000 156,000 238,000 188,000 $50,000 The investment banker is interested in acquiring one of these companies. However, she is concerned about the impact that each company's cost structure might have on its profitability.

Answer 2

Question

Chapter 6, Problem 6.16E

(a)

To determine

Operating leverage:

Operating leverage refers to the measurement of the degree of the variable and fixed costs used by the firm. In other words, the operating leverage refers to the reacted amount of net income of a company for the given change is sales.

To Calculate: Each company’s degree of operating leverage and also determine which company’s cost structure makes it more sensitive to changes in sales volume.

(b)

To determine

Net Income: The net income refers to that part of income on which the profit of the company is calculated. The net income is the total earnings of the company and it is derived after subtracting all the expense and taxes from the income. The net income is calculated when total costs are deducted from the net sales revenue.

To Determine: The effects on each company’s net income if sales decreases by 15% and if sales increases by 10%.

(c)

To determine

Contribution Margin:

The process or theory, which is used to judge the benefit given by each unit of the goods produced, is called as contribution margin.

To Discuss: In which company the banker should acquire the investment.

Expert Solution & Answer

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Answer 3

Question

Chapter 6, Problem 6.16E

(a)

To determine

Operating leverage:

Operating leverage refers to the measurement of the degree of the variable and fixed costs used by the firm. In other words, the operating leverage refers to the reacted amount of net income of a company for the given change is sales.

To Calculate: Each company’s degree of operating leverage and also determine which company’s cost structure makes it more sensitive to changes in sales volume.

(b)

To determine

Net Income: The net income refers to that part of income on which the profit of the company is calculated. The net income is the total earnings of the company and it is derived after subtracting all the expense and taxes from the income. The net income is calculated when total costs are deducted from the net sales revenue.

To Determine: The effects on each company’s net income if sales decreases by 15% and if sales increases by 10%.

(c)

To determine

Contribution Margin:

The process or theory, which is used to judge the benefit given by each unit of the goods produced, is called as contribution margin.

To Discuss: In which company the banker should acquire the investment.

Expert Solution & Answer

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Answer 4

Question

Chapter 6, Problem 6.16E

(a)

To determine

Operating leverage:

Operating leverage refers to the measurement of the degree of the variable and fixed costs used by the firm. In other words, the operating leverage refers to the reacted amount of net income of a company for the given change is sales.

To Calculate: Each company’s degree of operating leverage and also determine which company’s cost structure makes it more sensitive to changes in sales volume.

(b)

To determine

Net Income: The net income refers to that part of income on which the profit of the company is calculated. The net income is the total earnings of the company and it is derived after subtracting all the expense and taxes from the income. The net income is calculated when total costs are deducted from the net sales revenue.

To Determine: The effects on each company’s net income if sales decreases by 15% and if sales increases by 10%.

(c)

To determine

Contribution Margin:

The process or theory, which is used to judge the benefit given by each unit of the goods produced, is called as contribution margin.

To Discuss: In which company the banker should acquire the investment.

Expert Solution & Answer

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Answer 5

Chapter 6, Problem 6.16E

(a)

To determine

Operating leverage:

Operating leverage refers to the measurement of the degree of the variable and fixed costs used by the firm. In other words, the operating leverage refers to the reacted amount of net income of a company for the given change is sales.

To Calculate: Each company’s degree of operating leverage and also determine which company’s cost structure makes it more sensitive to changes in sales volume.

(b)

To determine

Net Income: The net income refers to that part of income on which the profit of the company is calculated. The net income is the total earnings of the company and it is derived after subtracting all the expense and taxes from the income. The net income is calculated when total costs are deducted from the net sales revenue.

To Determine: The effects on each company’s net income if sales decreases by 15% and if sales increases by 10%.

(c)

To determine

Contribution Margin:

The process or theory, which is used to judge the benefit given by each unit of the goods produced, is called as contribution margin.

To Discuss: In which company the banker should acquire the investment.

Answer 6

Chapter 6, Problem 6.16E

(a)

To determine

Operating leverage:

Operating leverage refers to the measurement of the degree of the variable and fixed costs used by the firm. In other words, the operating leverage refers to the reacted amount of net income of a company for the given change is sales.

To Calculate: Each company’s degree of operating leverage and also determine which company’s cost structure makes it more sensitive to changes in sales volume.

Answer 7

Chapter 6, Problem 6.16E

(a)

To determine

Operating leverage:

Operating leverage refers to the measurement of the degree of the variable and fixed costs used by the firm. In other words, the operating leverage refers to the reacted amount of net income of a company for the given change is sales.

To Calculate: Each company’s degree of operating leverage and also determine which company’s cost structure makes it more sensitive to changes in sales volume.

Answer 8

(b)

To determine

Net Income: The net income refers to that part of income on which the profit of the company is calculated. The net income is the total earnings of the company and it is derived after subtracting all the expense and taxes from the income. The net income is calculated when total costs are deducted from the net sales revenue.

To Determine: The effects on each company’s net income if sales decreases by 15% and if sales increases by 10%.

Answer 9

(b)

To determine

Net Income: The net income refers to that part of income on which the profit of the company is calculated. The net income is the total earnings of the company and it is derived after subtracting all the expense and taxes from the income. The net income is calculated when total costs are deducted from the net sales revenue.

To Determine: The effects on each company’s net income if sales decreases by 15% and if sales increases by 10%.

Answer 10

(c)

To determine

Contribution Margin:

The process or theory, which is used to judge the benefit given by each unit of the goods produced, is called as contribution margin.

To Discuss: In which company the banker should acquire the investment.

Answer 11

(c)

To determine

Contribution Margin:

The process or theory, which is used to judge the benefit given by each unit of the goods produced, is called as contribution margin.

To Discuss: In which company the banker should acquire the investment.

Answer 12

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Answer 13

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Answer 14

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Answer 15

Ch. 6 - What is meant by CVP analysis?Ch. 6 - Provide three examples of management decisions...Ch. 6 - Prob. 3Q Ch. 6 - Describe the features of a CVP income statement...Ch. 6 - The traditional income statement for Wheat Company...Ch. 6 - Prob. 6Q Ch. 6 - What is meant by the term sales mix? How does...Ch. 6 - Prob. 8Q Ch. 6 - Prob. 9Q Ch. 6 - Prob. 10Q

Solution Summary: The author explains the degree of operating leverage for each company and determines which company's cost structure makes it more sensitive to changes in sales.

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Contribution Margin:

The process or theory, which is used to judge the benefit given by each unit of the goods produced, is called as contribution margin.

To Discuss: In which company the banker should acquire the investment.

Want to see the full answer?

Chapter 6 Solutions

Solution Summary: The author explains the degree of operating leverage for each company and determines which company's cost structure makes it more sensitive to changes in sales.

Videos

Contribution Margin: The process or theory, which is used to judge the benefit given by each unit of the goods produced, is called as contribution margin. To Discuss: In which company the banker should acquire the investment.

Want to see the full answer?

Chapter 6 Solutions

Contribution Margin:

The process or theory, which is used to judge the benefit given by each unit of the goods produced, is called as contribution margin.

To Discuss: In which company the banker should acquire the investment.