K-Street Armory Manufacturing Company\'s (KSAMC) market research has just indica
ID: 2577354 • Letter: K
Question
K-Street Armory Manufacturing Company's (KSAMC) market research has just indicated that due to market recovery from recent recession, KSAMC would be able to achieve, no less than, a fifteen percent increase in its sales in the quarter succeeding the first one this year. Because of its forecast, KSAMC has invested in the latest robots in its industry to enable it to produce the requisite volume while maintaining its cost leadership competitive position. This investment has shifted KSAMC quarterly fixed expenses to the present $80,000 (this was $55,000 for a long time in the past). KSAMC’s present operating leverage is nine times (representing a shift from six times for a long time in the past). KSAMC’s total sales this quarter is $120,000.
Required: Assuming that KSAMC’s market research would be right on target, what would be the total relevant profit to expect in the quarter succeeding the first one this year if this first quarter’s relevant profit is $10,000? (Please, show your computations below!)
Explanation / Answer
>>>>The details for the current quarter given in the question are as follows :-
Quarterly fixed expenses = $80,000
Operating leverage = 9 times
Sales = $ 120,000
Relevant Profit = $ 10,000
Now, using the above information , we will first find Contribution :-
Operating Leverage = Contribution / Net Profit
9 = Contirbution /10000
Contribution = $90,000
Now, we know that:-
Contribution = Sales - Variable Cost
$90,000 = 120,000 - Variable Cost
Variable Cost = $30,000
Hence Variable cost if 25% of Sales (30000/120000 * 100)
>>>>>Not we need to find the relevant profit for the next quarter:-
It's given in the question that , the target is to acheive Increase in sales of 15% in the next quarter .
Hence, variable expenses would increase accordingly. ie. by 15%
Fixed expenses would remain the same at $80,000
Calculation of relevant profit for the succeeding quarter is as follows :-
Sales (120000 + 15% ) 138,000
Less:-Variable Cost (25%) (34,500)
Contribution 103,500
Less:-Fixed Cost (80000)
Relevant Profit 23,500
Hence the relevant profit for the quarter succeeding the first one this year will be $23,500.
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