Fulp Inc. and Baucom Inc. have the following operating data: Fulp Baucom Sales $
ID: 2352267 • Letter: F
Question
Fulp Inc. and Baucom Inc. have the following operating data:Fulp Baucom
Sales $3000000 1600000
Variable Costs 1400000 600000
Contribution Margin 160000 1000000
Fixed Costs 1200000 600000
Income from
Operations 400000 400000
a. Compute the operating leverage for Fulp Inc. and Baucom Inc. If required, round to one decimal place.
Fulp Inc.:
Baucom Inc.:
b. How much would income from operations increase for each company if the sales of each increased by 25%? If required, round percentages to one decimal place.
Fulp Inc.:
$
%
Baucom Inc.:
$
%
c. Why is there a difference in the increase in income from operations for the two companies? Explain
Explanation / Answer
(a) Operating Leverage Fulp Inc: 1600000/400000 = 4 Baudom Inc: 1000000/400000 = 2.5 (b) Fulp Inc: %: 25% x 4 = 100% $: 400000 x 100% = $400000 Baucom Inc: %: 25% x 2.5 = 62.5% $: 400000 x 62.5% = $250000 (c) There will be different in the 2 companies due to the different in the cost composition (Fixed cost to total cost). Baucom's fixed cost comprises of 50% of the total cost, thus an increase in sales will have less effect on the operating income compared to Fulp, for which fixed cost comprise 12/26 = 46% of the total cost Hope this helps!
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