Question : 19) If a company has a degree of operating leverage : 1217158

 

19) If a company has a degree of operating leverage of 4.0, that means a 10% increase in sales will result in a 40% increase in variable costs.

 

20) When a company has at least some fixed costs, the degree of operating leverage is different at different levels of sales.

21) Query Company sells pillows for $25.00 each. The manufacturing cost, all variable, is $10 per pillow. The company is planning on renting an exhibition booth for both display and selling purposes at the annual crafts and art convention. The convention coordinator allows three options for each participating company. They are:

1.paying a fixed booth fee of $5,010, or

2.paying an $4,000 fee plus 10% of revenue made at the convention, or

3.paying 20% of revenue made at the convention.

 

Required:

a.Compute the breakeven sales in pillows of each option.

b.Which option should Query Company choose, assuming sales are expected to be 800 pillows?

 

22) Auto Tires has been in the tire business for four years. It rents a building but owns all of its equipment. All employees are paid a fixed salary except for the busy season (April-June), when temporary help is hired by the hour. Utilities and other operating charges remain fairly constant during each month except those in the busy season.

 

Selling prices per tire average $75 except during the busy season. Because a large number of customers buy tires prior to winter, discounts run above average during the busy season. A 15% discount is given when two tires are purchased at one time. During the busy months, selling prices per tire average $60.

 

The president of Auto Tires is somewhat displeased with the company’s management accounting system because the cost behavior patterns displayed by the monthly breakeven charts are inconsistent; the busy months’ charts are different from the other months of the year. The president is never sure if the company has a satisfactory margin of safety or if it is just above the breakeven point.

 

Required:

a.What is wrong with the accountant’s computations?

b.How can the information be presented in a better format for the president?

23) Dolph and Evan started the DE Restaurant in 20X3. They rented a building, bought equipment, and hired two employees to work full time at a fixed monthly salary. Utilities and other operating charges remain fairly constant during each month.

 

During the past two years, the business has grown with average sales increasing 1% a month. This situation pleases both Dolph and Evan, but they do not understand how sales can grow by 1% a month while profits are increasing at an even faster pace. They are afraid that one day they will wake up to increasing sales but decreasing profits.

 

Required:

Explain why the profits have increased at a faster rate than sales. Use the terms variable costs and fixed costs in your response.

 

24) Freddie’s company has mostly fixed costs and Valerie’s company has mostly variable costs. Which company has the greatest risk of a net loss? Explain why

 

25) Suppose a company decided to automate a production line. Explain what effects this would have on a company’s cost structure using CVP terminology. Could these changes have any possible negative effect on the firm?

 

 

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