nd Company to invest. The two investment opportunities are presented below showi
ID: 2512431 • Letter: N
Question
nd Company to invest. The two investment opportunities are presented below showing Company A a B financial sales and costs data: 2) You are a venture capitalist facing two alternative investment opportunities and you have $80o,000 B. $200,000 $200,000 Sales Revenue (8,000 units) $7.00 16.00 $128,000 56,000 $ 72,000 Variable Cost per unit Variable Costs Tota $144,000 Contribution Margin (Sales - Vc) Fixed Costs Total $ 24,000 96,000 Net Income $48,000 $48,000 Requirements: a) Calculate the Break Even Point in Total Sales Dollars for Both Investments b) Calculate Operating Leverage Ratio (CM/NI) for Both Investments c) If Both Investments experience Sales Growth of 10%, calculate Net Income d) If Both Investments experience a 10% decline in sales, calculate Net IncomeExplanation / Answer
Answer to Part a.
Investment A:
Break Even Point (in Dollar Sales) = Fixed Cost / Contribution Margin Ratio
Contribution Margin Ratio = 72,000 / 200,000 * 100
Contribution Margin Ratio = 36%
Break Even Point (in Dollar Sales) = 24,000 / 0.36
Break Even Point (in Dollar Sales) = $66,666.67
Investment B:
Break Even Point (in Dollar Sales) = Fixed Cost / Contribution Margin Ratio
Contribution Margin Ratio = 144,000 / 200,000 * 100
Contribution Margin Ratio = 72%
Break Even Point (in Dollar Sales) = 96,000 / 0.72
Break Even Point (in Dollar Sales) = $133,333.33
Answer to Part b.
Investment A:
Operating Leverage Ratio = Contribution Margin / Net Income
Operating Leverage Ratio = 72,000 / 48,000
Operating Leverage Ratio = 1.50
Investment B:
Operating Leverage Ratio = Contribution Margin / Net Income
Operating Leverage Ratio = 144,000 / 48,000
Operating Leverage Ratio = 3.00
Answer to Part c.
Investment A:
On Sales Growth, the change in Net Income would increase by percentage increase in Contribution Margin
Increase in Net Income = % Change in Sales * Contribution Margin
Increase in Net Income = $72,000 * 10% = $7,200
Revised Net Income = $48,000 + $7,200
Revised Net Income = $55,200
Investment B:
On Sales Growth, the change in Net Income would increase by percentage increase in Contribution Margin
Increase in Net Income = % Change in Sales * Contribution Margin
Increase in Net Income = $144,000 * 10% = $14,400
Revised Net Income = $48,000 + $14,400
Revised Net Income = $62,400
Answer to Part d.
Investment A:
On Sales decline, the Change in Net Income would decrease by percentage decrease in Contribution Margin
Decrease in Net Income = % Change in Sales * Contribution Margin
Decrease in Net Income = $72,000 * 10% = $7,200
Revised Net Income = $48,000 - $7,200
Revised Net Income = $40,800
Investment B:
On Sales decline, the Change in Net Income would decrease by percentage decrease in Contribution Margin
Decrease in Net Income = % Change in Sales * Contribution Margin
Decrease in Net Income = $144,000 * 10% = $14,400
Revised Net Income = $48,000 - $14,400
Revised Net Income = $33,600
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