Degrees of Leverage
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:
- Calculate the contribution margins for the two companies.
- Calculate the break-even point for each firm, in dollars and in units.
- Compare the two companies. What conclusions could you make regarding the use of operating leverage employed by the two firms?
- 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.
- Based on the information from the above questions, what recommendations would you make to the two companies and why?
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