Exercise 16.21 Operating Leverage Income statements for two different companies
ID: 2460003 • Letter: E
Question
Exercise 16.21
Operating Leverage
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 in dollars for each company.
Why is the break-even point for Quintex, Inc., higher?
- select your answer -Because it must cover more in fixed expenses. Because it is less profitable.Because its contribution margin ratio is lower.Item 5
3. Suppose that both companies experience a 50 percent increase in revenues. Compute the percentage change in profits for each company.
% (NOT 50%, 2%, or 100%)
Exercise 16.21
Operating Leverage
Income statements for two different companies in the same industry are as follows:
Required:
1. Compute the degree of operating leverage for each company.
Trimax Quintex2. Compute the break-even point in dollars for each company.
Trimax, Inc. $ Quintex, Inc. $Why is the break-even point for Quintex, Inc., higher?
- select your answer -Because it must cover more in fixed expenses. Because it is less profitable.Because its contribution margin ratio is lower.Item 5
3. Suppose that both companies experience a 50 percent increase in revenues. Compute the percentage change in profits for each company.
Trimax% (NOT 50%, 2%, or 100%)
Quintex % (NOT 300%, 8% or 20%)Explanation / Answer
1./
OPERATING LEVERAGE OF TRIMAX = CONTRIBUTION MARGIN / OPERATING INCOME
= $250000 / $50000
= 5
OPERATING LEVERAGE OF QUINTEX = CONTRIBUTION MARGIN / OPERATING INCOME
= $400000 / $50000
= 8
2./
BREAK EVENT POINTS IN DOLLAR
TRIMAX INC.
CONTRIBUTION MARGIN RATIO = $250000 / $500000
= 0.5
BEP = TOTAL FIXED COST / CONTRIBUTION MARGIN RATIO
= $200000 / 0.5
= $400000
QUINTEX INC.
CONTRIBUTION MARGIN RATIO = $400000 / $500000
= 0.8
BEP = TOTAL FIXED COST / CONTRIBUTION MARGIN RATIO
= $350000 / 0.8
= $437500
BEP OF QUINTEX INC. IS HIGHER BECAUSE IT MUST COVER MORE IN FIXED EXPENSES.
3./
TRIMAX INC.
PARTICULLAR TRIMAX INC. QUINTEX INC. SALES $750000 $750000 LESS VARIABLE COST $375000 $150000 CONTRIBUTION MARGIN $375000 $600000 LESS FIXED COST $200000 $350000 OPERATING INCOME $175000 $250000 INCEREASE IN OPERATING INCOME $125000 $200000 INCEREASE % 250% 400%Related Questions
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