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In: Accounting

tastykreme and krispy kake are both producers of baked goods, but each has followed a different...

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.

Solutions

Expert Solution

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)

ekkarill92 answered 3 years ago
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