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

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

 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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