We design and market Skechers-branded lifestyle footwear for men, women and chil
ID: 2329471 • Letter: W
Question
We design and market Skechers-branded lifestyle footwear for men, women and children, and performance footwear for men and women under the Skechers GO brand name.... As of February 15 2015, we owned and operated 119 concept stores, 146 factory outlet stores and 98 warehouse outlet stores in the United States, and 51 concept stores, 33 factory outlet stores, and three warehouse outlet stores internationally The popularity of Skechers' products has increased significantly in recent years. Sales increased from $1,560.3 million in 2012 to $2,377.6 million in 2014, for an increase of 52.4 percent. In the same period, operating income increased from $22.3 million to $209.0 million, for an increase of 837 percent. It should be noted that this growth was not the result of larger acquisitions of or mergers with other companies.Explanation / Answer
a) The accounting concept involved is the Operating Leverage.
Operating leverage is the ratio obtained by dividing the % change in sales by the % change in operating income. It tells how a change in sales magnifies the operating income.
The ratio is called 'degree of operating leverage'.
In the subject case the the degree of operating leverage is 837/52 = 16.10.
b) Increase in sales would increase the total variable costs proportionately; but fixed costs would remain the same, provided the increase in activity is withing the relevant range for which fixed costs are constant.
Variable costs would be direct material, direct labor and the variable portion of manufacturing overhead. The total of these costs would be in proportion to the number of units produced. Hence, the unit variable costs would remain the same at all levels of output.
Fixed manufacturing costs would remain the same, if the increased activity level is within the relevant range of activity within which fixed costs remain constant.
Hence, in the subject case, total variable costs have increased proportionately but fixed costs have remained constant.
c) The margin of safety is a measure of how high the current sales level is, above the break even sales level. In the subject case the margin of safety would have increased with increase in sales.
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