# Compare the two companies in the Degree of Leverage

Sigchi4life
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Price: \$5 USD

Question description

Assume that two companies, Brake, Inc. and Carbo, Inc., have the following operating results:

 Brake, Inc. Carbo, Inc. Sales \$300,000 \$300,000 Variable Costs 60,000 180,000 Fixed Costs 210,000 90,000 Operating Income \$30,000 \$30,000

Required:

1. Calculate the contribution margins for the two companies.

Contribution margin = (Revenues – Variable expenses) / Revenues

Brake, Inc: (\$300,000 - \$60,000) / \$300,000 = \$240,000 / \$300,000 = 80%

Carbo, Inc.: (\$300,000 - \$180,000) / \$300,000 = 40%

1. Calculate the break-even point for each firm, in dollars and in units.

Break-even point per unit = Fixed expenses / (Price - Variable expenses)

Brake, Inc.:

Carbo, Inc.:

1. Compare the two companies. What conclusions could you make regarding the use of operating leverage employed by the two firms?
2. Assume that both companies experience an increase in sales by 15% next year.  What would be the operating income for each firm net year? Explain the difference in the change in operating income between the two companies.
3. Based on the information from the above questions, what recommendations would you make to the two companies and why?

(Top Tutor) Daniel C.
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School: UCLA
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