Computation of contribution margin and operating income.
Understanding the effects of operating leverage High Tech, Inc., and Old-time Co compete within the same industry and had the following operating results in 2008:
|
|
High Tech
|
Old-time Co.
|
|
Sales
|
$2,100,000
|
$2,100,000
|
|
Variable expenses
|
420,000
|
1,260,000
|
|
Contribution Margin
|
$1,680,000
|
$840,000
|
|
Fixed expenses
|
1,470,000
|
630,000
|
|
Operating income
|
$210,000
|
$210,000
|
Required:
A) Explain why an equal percentage increase (or decrease) in sales for each firm would have such differing effects on operating income.
B) Calculate the ratio of contribution margin to operating income for each firm in 2008. (Hint: Divide contribution margin by operating income.)
C) Multiply the expected increase in sales of 20% for 2009 by the ratio of contribution margin to operating income for 2008 computed in requirement F) for each firm. (Hint: Multiply your answer in requirement F by .2)