Question

In: Operations Management

USE THE FOLLOWING INFORMATION FOR THE NEXT 3 QUESTIONS                      Below is an income statement for...

USE THE FOLLOWING INFORMATION FOR THE NEXT 3 QUESTIONS

                     Below is an income statement for XYZ Company for 2020:

Sales

$400,000

Variable costs

(150,000)

Contribution margin

$250,000

Fixed costs

(200,000)

Net Income

$ 50,000

           37. Calculate breakeven sales dollars for XYZ Company using the Y-formula.

                       A. $220,000

                       B. $320,000

                       C. $350,000

                       D. $270,000

38. The degree of leverage (DOL) for XYZ Company in 2020 is equal to what amount?

            A. 1.0

            B. 2.0

            C. 3.0

            D. 4.0

            E. 5.0

39. Using the degree of leverage (DOL) for 2020 that you just calculated in question #38, if XYZ Company expects sales to increase 10% in 2021, by how much will the net income increase in 2021?

  1. $5,000
  2. $10,000
  3. $15,000
  4. $20,000
  5. $25,000

Solutions

Expert Solution

Q37 : $350,000

We know that breakeven sales is that sales value which gives net income = 0.

Net Income = Sales - Variable Cost - Fixed Cost.

To find the Breakeven Sales we equate net income = 0 in the above equation and solve for Sales. Hence we have the below as Variables Cost = 150000 and Fixed Cost = 200000

0 = Breakeven Sales - 150000 - 200000

0 = Breakeven Sales - 350000

Breakeven Sales = 350000

Hence breakeven sales = $350000

Q38 : 5.0

Degree of leverage(DOL) is given using below formula

For the given case this formula becomes

Hence degree of leverage is 5.0

Q39 : $25,000

The degree of leverage is 5.0. This means that for every 1% increase in Sales, the net income will increase by 5%. As the Sales increase by 10%, the net income will increase by 10*5 = 50%. As the current net income is 50000, the increase in net income is 50%*50000 = $25,000

keosha answered 5 months ago
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