The firm's "cost structure" for the above question is primarily (circle one: VARIABLE FIXED What is the ex

Selling $210 otal Dalliar la The firms cost stracture for the above question is primarily (circle one: VARIABLE FDXED Selling Price Expectod Sales 12. What is the loss for the wir Rass Creane an Ine Stmt using the full CM format (gore taxes) Totel Delars SP FC 13. Based on the above Income Statement prepared, what is the curent Operating Leverageand what dellar amount and percentage increase in profits would be expected with say a 10% increase un unit sales? Show your work and prepare a new CMd income stme (template) below to confirm (prove) your answ 14. Considering the foemula for Operating Leverage, if no fixed costs had existed in the above fact pathern, opcrating leverage would have been (is, would always bek 15. If the kevel of activity (X) increases, within the relevant range of activity (isclass pizza example) a Variable cosltl per unit will increase b. Total fised costs will incrcase C. Total costs will actualy decrease d Fixed cost per unit will increase e. Total variable costs will increase

The firm’s “cost structure” for the above question is primarily (circle one: VARIABLE FIXED What is the expected profit/loss for the period? Create an Inc Stmt using the full CM format (Ignore taxes). Based on the above Income Statement prepared, what is the current “Operating Leverage” and what dollar amount and percentage increase in profits would be expected with say a 10% increase in unit sales? Show your work and prepare a new CM income stmt (template) below to confirm (prove) your answer. Considering the formula for “Operating Leverage”, if no fixed costs had existed in the above fact pattern, operating leverage would have been (i.e, would always be): a. Negative b. Zero c. 1.0 d. > 2.0 If the level of activity (X) increases, within the relevant range of activity (i.e. class pizza example) a Variable cost per unit will increase b. Total fixed costs will increase C. Total costs will actually decrease d. Fixed cost per unit will increase e. Total variable costs will increase

Expert Answer

 

11
Given
Sales 300000 210000/.70*1
Variable Cost 30% 90000 210000/.70*.30
Contribution 210000 210000
Fixed Cost 340000 210000+130000
Loss -130000 -130000
Unit Basis % Total dollars
SP 100 100.00% 300000
VC 30 30.00% 90000
CM 70 70.00% 210000
FC 113.33 113.33% 340000
Loss -43.33 -43.33% -130000
11a The firm cost structure is variable.
12
Unit Basis % Total dollars
SP 30 100.00% 1200000 30*40000
VC 27 90.00% 1080000 27*40000
CM 3 10.00% 120000 SP-VC
FC 2.75 9.17% 110000 given
Profit 0.25 0.83% 10000 CM- FC
13
Operating Leverage CM/ Income
120000/10000
12
10% increase in unit sales
40000*110% 44000
Unit Basis % Total dollars
SP 30 100.00% 1320000 30*44000
VC 27 90.00% 1188000 27*44000
CM 3 10.00% 132000 SP-VC
FC 2.50 8.33% 110000 same
Profit 0.50 1.67% 22000 CM- FC
% increase in profit is 1.67% – 0.83% = 0.84%
14
if there were no fixed cost, Operating leverage will be zero.
answer is option b
15
if level of activity increases within a range the total variable cost will increase.
answer is option d.
For your undertanding:
this you can see above in part 13, where there was 10% increase, the total variable cost increased.
option a, Per unit VC was same it did not increase.
Total fixed cost was same it did not increase
Total cost increased it did not decrease
fixed cost per unit decrease it did not increase
so last option e is correct
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