Vaughn Manufacturing has sales of $2200000, variable costs of $800000, and fixed

Question

Vaughn Manufacturing has sales of $2200000, variable costs of $800000, and fixed costs of $1200000. Vaughn’s degree of operating leverage is

Sheffield Corp.’s degree of operating leverage is 2.5. Warren Corporation’s degree of operating leverage is 12.0. Warren’s earnings would go up (or down) by ________ as much as Sheffield’s with an equal increase (or decrease) in sales.

Crane Company currently manufactures a wicket as its main product. The costs per unit are as follows:

$22

Saran Company has contacted Crane with an offer to sell it 5100 of the wickets for $16 each. If Crane makes the wickets, variable costs are $14 per unit. Fixed costs are $8 per unit; however, $5 per unit is unavoidable. Should Crane make or buy the wickets?

Coronado Industries produces 60000 CDs on which to record music. The CDs have the following costs:

None of Coronado Industries’s fixed overhead costs can be reduced, but another product could be made that would increase profit contribution by $4000 if the CDs were acquired externally. If cost minimization is the major consideration and the company would prefer to buy the CDs, what is the maximum external price that Coronado Industries would be willing to accept to acquire the 60000 units externally?

Explanation / Answer

Operating leverage = 2200000-800000/2200000-800000-1200000 = 7 times

Warren's earnings would go up or down by 4.8 times as much as Sheffeild's with an equal increase (decrease)in sales.

Buy - Savings = $5100

Maximum external price = $31500

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