Verizon LTE 6:20 PM unf.edu * 54%) @ points i you nave une correct answers. Prob

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Verizon LTE 6:20 PM unf.edu * 54%) @ points i you nave une correct answers. Problem 1 Income information for Wimblee Inc. is presented below for a month in which 1,000 units were sold. Sales revenue, $62 each Variable costs, $34.50 per unit Foed costs, $16 per unit Operating Income, $155,000 A. Compute the operating leverage for Company X. Assign the correct label ($, %, etc.) Display with 5 decimals. B. Use the operating leverage approach as support and show calculations to determine the new profit if Wimblee experiences a 22% decrease in sales volume. Use 5 decimals on interim calculations C. What is cost structure? How does it impact operating leverage? D. How is risk associated with cost structure? E. Why does a company become more risky when its fixed costs proportion increases? Problem 2 Kirk Company plans to produce 50,000 buckets next

Explanation / Answer

Question - A

Operating Leverage = Contribution / EBIT = 27500 / 11500 =  2.39130

Question - B

Change in Operating Income = 22 * 2.39130 = 52.6086 % or 52.61 %

Question - C

Cost structure means the combination of Fixed and variable cost composition in the total cost of the product. When the company is having lower variable cost due to high fixed cost, it will have high contribution. But advantage of high contribution in total terms is possible only when it had sales in excess of break even point. Otherwise, fixed costs become a burden and put the company into operating losses.

Question - D

More the fixed cost more will be the operating risk. Because more units to be sold to break - even. That is company's obligation to show minimum operations shall increase.

Question - E

Increase in fixed cost increase the Degree of operating leverage.

Sales = 1000 * 62 62000 (-) Variable cost 34500 Contribution 27500 (-) Fixed cost 16000 EBIT 11500

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