Question
In: Finance
You estimate that your soy farm will $1.3 million of profits on sales of $6.0 million...
You estimate that your soy farm will $1.3 million of profits on sales of $6.0 million under normal economic conditions, and that the degree of operating leverage is 4.2. What will profits be if sales turn out to be $5.4 million?
Solutions
Expert Solution
Compute the contribution margin, using the equation as shown below:
Contribution = Degree of operating leverage*Income
= 4.2 times*$1,300,000
= $5,460,000
Hence, the contribution margin is $5,460,000.
Compute the fixed cost, using the equation as shown below:
Fixed cost = Contribution – Income
= $5,460,000 - $1,300,000
= $4,160,000
Hence, the fixed cost is $4,160,000.
Compute the new contribution margin, using the equation as shown below:
New contribution = (Existing contribution*New sales)/ Existing Sales
= ($5,460,000*$5,400,000)/ $6,000,000
= $4,914,000
Hence, the new contribution is $4,914,000.
Compute the profit due to new sales, using the equation as shown below:
Profit = New contribution – Fixed cost
= $4,914,000 - $4,160,000
= 754,000
Hence, the profit due to new sales is $754,000.
jeff jeffy answered 2 years agoRelated Solutions
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