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Income statements for two different companies in the same industry are as follows: Trimax Inc Quintex...

Income statements for two different companies in the same industry are as follows:

Trimax Inc Quintex Inc

Sales $500,000 $500,000

Less: Variable costs 250,000 100,000

Contribution margin 250,000 400,000

Less: Fixed Costs 200,000 350,000

Operating income 50,000 50,000

Required:

1. Compute the degree of operating leverage for each company.

2. Compute the break-even point for each company. Explain why the break-even point for Quintex Inc. is higher.

3. Suppose that both companies experience a 50 percent increase in revenue. Compute the percentage change in profits for each company. Explain why the percentage increase in Quintex's profits is so much greater than that of Trimax.

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Expert Solution

Particulars Trimax Quintex
Sales $500,000 $500,000
Variable Cost $250,000 $100,000
Contribution Margin $250,000 $400,000
PV Ratio 0.5 0.8
Fixed Costs $200,000 $350,000
Profit $50,000 $50,000
Operating Leverage   =    Contribution Margin/ EBIT
=250000/50000 =400000/50000
5 8
Break Even Point = Fixed Cost/ PV ratio
$400,000 $437,500
New Sales $                     750,000 $750,000
New Contribution Margin $                     375,000 $600,000
Fixed Cost $                     200,000 $350,000
Profit , $175,000 $250,000
Old Profit $                       50,000 $             50,000
Change in Profit 125000 200000
% Change 250% 400%

ekkarill92 answered 3 years ago
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