Question

HighTech, Inc., and OldTime Co. compete within the same industry and had the following operating results in 2012:

	HighTech, Inc.			OldTime Co.
Sales	$	2,300,000		$	2,300,000
Variable expenses		490,000			1,400,000
Contribution margin	$	1,810,000		$	900,000
Fixed expenses		1,570,000			650,000
Operating income	$	240,000		$	250,000

   

Required:
a.	Calculate the break-even point for each firm in terms of revenue. (Do not round intermediate calculations and round your final answers to the nearest whole dollar.)

     

b.	What observations can you draw by examining the break-even point of each firm given that they earned an equal amount of operating income on identical sales volumes in 2012?
	The breakeven point for both firms is same because both the firms have same amount of fixed costs to be recovered. The breakeven point for each firm is different because each firm has a different amount of fixed costs to be recovered.

     

c.1	Calculate the amount of operating income (or loss) that you would expect each firm to report in 2013 if sales were to increase by 20%. (Losses should be indicated by minus sign. Do not round intermediate calculations.)

      

c.2	Calculate the amount of operating income (or loss) that you would expect each firm to report in 2013 if sales were to decrease by 20%. (Losses should be indicated by minus sign. Do not round intermediate calculations.)

      

d.	Using the amounts computed in part c above, calculate the increase or decrease in the amount of operating income expected in 2013 from the amount reported in 2012.

     

e.	Explain why an equal percentage increase (or decrease) in sales for each firm would have such differing effects on operating income.
	HighTech, Inc. has significantly more operating leverage than does OldTime Co. because its fixed costs are much higher and its contribution margin ratio is also much higher. OldTime Co. has significantly more operating leverage than does HighTech, Inc. because its fixed costs are much higher and its contribution margin ratio is also much higher.

     

f.	Calculate the ratio of contribution margin to operating income for each firm in 2012. (Hint: Divide contribution margin by operating income.) (Do not round intermediate calculations and round your final answers to 2 decimal places.)

     

g.	Multiply the expected increase in sales of 20% for 2013 by the ratio of contribution margin to operating income for 2012 computed in part f for each firm. (Hint: Multiply your answer in part f by 0.2.) (Do not round intermediate calculations and round your final answers to 2 decimal places.)

     

h.	Multiply your answer in part (g) by the 2012 operating income given in the problem. (Do not round intermediate calculations.)

     

i.	Compare your answer in part h with your answer in part d. What conclusions can you draw about the effects of operating leverage from the steps you performed in parts f, g, and h?
	The answer calculated in Part (h) is higher than the answer calculated in Part (d). The answer calculated in Part (h) is lower than the answer calculated in Part (d). The answer calculated in Part (h) is equal to the answer calculated in Part (d).

rev: 12_12_2013_QC_42481

Answer 1

Part a - Calculation of Break Even Revenue

Break Even Revenue = Fixed cost/ Contribution Margin Ratio

Contribution Margin ratio = (Contribution/Sales)*100

Particulars	High Tech Inc.	Oldtime co.
Sales (A)	$2300000	$2300000
Contribution (B)	$1810000	$900000
Contribution Margin ratio (A/B)*100	78.70%	39.13%
Fixex cost	$1570000	$650000
Break Even Revenue	$1995028	$1661111

Part b - Observation of Break Even Analysis

Assuming Contribution Margin ratio is same for both firms, Break even revenue will be same if there is same amount of fixed costs to recovered.

Break even revenue is different if there are different amount of fixed costs to recovered.

Since in this case, Contribution margin and fixed are different hence break even revenue is different

Part c-1 - Operating Income If sales increase by 20%

High tech inc Variable cost ratio = (100% - 78.7%) = 21.3%

Oldtime and co. = (100% - 39.13%) = 60.87%

Particulars	High tech Inc	Oldtime Co.
Sales ($2300000+20%)	$2760000	$2760000
Less : Variable cost	$588000 ($490000 + 20%)	$1680000 ($1400000 + 20%)
Contribution Margin	$2172000	$1080000
Less : Fixed Cost	$1570000	$650000
Net operating Income	$602000	$430000

Part c-2 - Operating Income If sales decrease by 20%

Particulars	High tech Inc	Oldtime co.
Sales	$1840000 ($2300000 - 20%)	$1840000 ($2300000 - 20%)
Less : Variable cost	$392000 ($490000 - 20%)	$1120000 ($1400000 - 20%)
Contribution Margin	$1448000	$720000
Less : Fixed cost	$1570000	$650000
Net Operating Income	-$122000	$70000

Part d. Calculation of Increase or Decrease in sales revenue in 2013

Particulars	High tech inc	High tech inc	Oldtime co.	OldTime co.
	Increase +20%	Decrease -20%	Increase +20%	Decrease -20%
Net Operating Income in 2012	$240000	$240000	$250000	$250000
Net Operating Income in 2013	$602000	$430000	-$122000	$70000
Increase or decrease in income	$362000 (Increase)	$190000 (Increase)	$372000 (Decrease)	$180000 (Decrease)