HighTech, Inc., and OldTime Co. compete within the same industry and had the fol

Question

HighTech, Inc., and OldTime Co. compete within the same industry and had the following operating results in 2010: HighTech, Inc. OldTime 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 ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________ Requirement 1: Calculate the break-even point for each firm in terms of revenue. (Omit the "$" sign in your response.) Breakeven sales revenue HighTech, Inc. $ OldTime Co. $ ________________________________________ Requirement 2: What observations can you draw by examining the break-even point of each firm given that they earned an equal amount of operating income on identical sales volumes in 2010? Requirement 3: (a) Calculate the amount of operating income (or loss) that you would expect each firm to report in 2011 if sales were to increase by 20%. (Omit the "$" sign in your response.) Operating income (or loss) HighTech, Inc. $ OldTime Co. $ ________________________________________ (b) Calculate the amount of operating income (or loss) that you would expect each firm to report in 2011 if sales were to decrease by 20%. (Negative amount should be indicated by a minus sign. Omit the "$" sign in your response.) Operating income (or loss) HighTech, Inc. $ OldTime Co. $ ________________________________________ Requirement 4: Using the amounts computed in requirement 3 above, calculate the increase or decrease in the amount of operating income expected in 2011 from the amount reported in 2010. (Input all amounts as positive values. Omit the "$" sign in your response.) HighTech, Inc OldTime Co. Expected increase in operating income $ $ Expected decrease in operating income $ $ ________________________________________ Requirement 5: Explain why an equal percentage increase (or decrease) in sales for each firm would have such differing effects on operating income. Requirement 6: Calculate the ratio of contribution margin to operating income for each firm in 2010. (Hint: Divide contribution margin by operating income.) Ratio of contribution margin HighTech, Inc times OldTime Co. times ________________________________________ Requirement 7: Multiply the expected increase in sales of 20% for 2011 by the ratio of contribution margin to operating income for 2010 computed in requirement 6 for each firm. (Hint: Multiply your answer in requirement 6 by 0.2.) (Omit the "%" sign in your response.) HighTech, Inc % OldTime Co. % ________________________________________ Requirement 8: Multiply your answer in requirement 7 by the operating income of $210,000 reported in 2010 for each firm.. (Omit the "$" sign in your response.) HighTech, Inc. $ OldTime Co. $ ________________________________________ Requirement 9: Compare your answer in requirement 8 with your answer in requirement 4. What conclusions can you draw about the effects of operating leverage from the steps you performed in requirements 6, 7, and 8?

Explanation / Answer

(1)Break even point(revenue) Hightech = (fixed costs/ contribution margin ratio ) = 14,70,000/(1-(420000/2100000)) = 1470000/(1-0.2) = $18,37,500 Old time = (fixed costs/ contribution margin ratio ) = 6,30,000/(1-12,60,000/21,00,000) = 6,30,000 / 0.4 = $15,75,000 (2)observations are as follows,the variable cost ratio of high tech is lesser than that of Old time (0.2630,000).hence old time reaches break even at the earliest than hightech This is the reason why both on identical sales earned identical operating income. (3)(1)The amount of operating income (or loss) that you would expect each firm to report in 2011 if sales were to increase by 20% Hightech = if sales increased by 20% then contribution will also increase by 20% i.e $16,80,000 x 120% - $14,70,000 = $5,46,000 Old time = if sales increased by 20% then contribution will also increase by 20% i.e 8,40,000 x 120% - $6,30,000 = $3,78,000 (3)(2)The amount of operating income (or loss) that you would expect each firm to report in 2011 if sales were to decrease by 20%. Hightech = if sales decreased by 20% then contribution will also decrease by 20% i.e $16,80,000 x 80% - $14,70,000 = Loss($1,26,000) Old time = if sales decreased by 20% then contribution will also decrease by 20% i.e 8,40,000 x 80% - $6,30,000 = Profit $42,000 (4)(1) Increase/decrease in Operating income when sales increased by 20% Hightech =($5,46,000 - $2,10,000) = $3,36,000(increase) Old time = ($3,78,000 - $2,10,000) = $1,68,000(increase) (4)(2) Increase/decrease in Operating income when sales decreased by 20% Hightech =($1,26,000 + $2,10,000) = ($3,36,000) (decrease) Old time = ($42,000 - $2,10,000) = ($1,68,000) (decrease) (5) The reasons are due to its variable costs and fixed costs (6) Ratio of contribution margin High tech = 1-(420000/2100000) = 1- 0.2 = 80% Old time = 1-(12,60,000/21,00,000) = 1 - 0.4 = 60% 7: Multiply the expected increase in sales of 20% for 2011 by the ratio of contribution margin to operating income for 2010 computed in requirement 6 for each firm hightech = 21,00,000 x 20% x 80% = $3,36,000 old time = 21,00,000 x 20% x 40% = $1,68,000 (8)Increase/decrease in Operating income when sales increased by 20% Hightech =($5,46,000 - $2,10,000) = $3,36,000(increase) Old time = ($3,78,000 - $2,10,000) = $1,68,000(increase) (9)from steps 6,7,8 shows that the operating leverage acts a major role i.e for every 20% increase in sales operating income increases by 20%

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