In: Accounting
tastykreme and krispy kake are both producers of baked goods, but each has followed a different production strategy. The differences in their strategies resulted in differences in their cost structure, as shown in the following table:
TastyKreme and Krispy Kake
Estimated sales in units: 20,000 and 35,000
Unit price: 6 and 8
Variable cost per unit: 3 and 3
Total fixed costs: 30,000 and 105,000
a) Compute the operating income and degree of operating leverage for each company
b) Assuming sales volume for each company will decline by 10% and that their cost structures will not change, compute the percentage and dollar amount of the change in operating income for each company.
Tasty kreme and krispy kake | ||
Particulars | Tasty kreme | Krispy kake |
Sales in units | 20000 | 35000 |
Unit price | 6 | 8 |
Variable cost per unit | 3 | 3 |
Total fixed costs | 30000 | 105000 |
a) Computation of Operating income | ||
Particulars | Tasty kreme | Krispy kake |
Sales | 120000 | 280000 |
Less : Variable cost | -60000 | -105000 |
Contribution margin | 60000 | 175000 |
Less : Fixed costs | -30000 | -105000 |
Operating income/ Earnings before interest and tax | 30000 | 70000 |
Operating leverage formula : CONTRIBUTION MARGIN / EBIT | ||
Degree of operating leverage | 2 times | 2.5 times |
b) Assuming sales volume decline by 10% and there is no change in cost structure : | ||
Particulars | Tasty kreme | Krispy kake |
Sales in units | 18000 | 31500 |
Unit price | 6 | 8 |
Variable cost per unit | 3 | 3 |
Total fixed costs | 30000 | 105000 |
Computation of Operating income | ||
Particulars | Tasty kreme | Krispy kake |
Sales | 108000 | 252000 |
Less : Variable cost | -54000 | -94500 |
Contribution margin | 54000 | 157500 |
Less : Fixed costs | -30000 | -105000 |
Operating income/ Earnings before interest and tax | 24000 | 52500 |
Operating leverage formula : CONTRIBUTION MARGIN / EBIT | ||
Degree of operating leverage | 2.25 times | 3 times |
Change in income when sale volume declined by 10% | 6000 | 17500 |
(30000-24000) | (70000-52500) | |
% OF CHANGE' | 20% | 25% |
(6000/30000*100) | (17500/70000*100) |