Compare the two companies in the Degree of Leverage

Sigchi4life
Category:
Business & Finance
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?

Tutor Answer

(Top Tutor) Daniel C.
(997)
School: UCLA
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