Question: Understanding the effects of operating leverage High Tech, Company, & Old time firm compete with in the same industry & 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;
[1] Describe why an equal percentage (%) increase [or decrease] in sales for each firm would have such differing effects on operating income.
[B] Compute the ratio of contribution margin to operating income for each firm in 2008. [Suggestion: Divide contribution margin by operating income.]
[C] Multiply the expected increase in sales of 20 percent for 2009 by the ratio of contribution margin to operating income for 2008 calculated in requirement F) for each company. [Suggestion: Multiply your answer in requirement F by .2]