HighTech, Inc., and OldTime Co. compete within the same industry and had the fol
ID: 340751 • Letter: H
Question
HighTech, Inc., and OldTime Co. compete within the same industry and had the following operating results in 2015:
Required:
a. Calculate the break-even point for each firm in terms of revenue. (Do not round intermediate calculations.)
b. 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 2015?
c.1 Calculate the amount of operating income (or loss) that you would expect each firm to report in 2016 if sales were to increase by 20%. (Losses should be indicated by minus sign.)
c.2 Calculate the amount of operating income (or loss) that you would expect each firm to report in 2016 if sales were to decrease by 20%. (Losses should be indicated by minus sign.)
d. Using the amounts computed in requirement c, calculate the increase or decrease in the amount of operating income expected in 2016 from the amount reported in 2015.
e. Explain why an equal percentage increase (or decrease) in sales for each firm would have such differing effects on operating income.
f. Calculate the ratio of contribution margin to operating income for each firm in 2015. (Do not round intermediate calculations and round your final answers to 2 decimal places.)
g. Multiply the expected increase in sales of 20% for 2016 by the ratio of contribution margin to operating income for 2015 computed in requirement f for each firm. (Do not round intermediate calculations and round your final answers to 2 decimal places.)
h. Multiply your answer in requirement g by the 2015 operating income given in the problem. (Do not round intermediate calculations.)
i. Compare your answer in requirement h with your answer in requirement d. What conclusions can you draw about the effects of operating leverage from the steps you performed in requirement f, g, and h?
HighTech, Inc. OldTime Co. Sales $ 3,500,000 $ 3,500,000 Variable expenses 700,000 2,100,000 Contribution margin $ 2,800,000 $ 1,400,000 Fixed expenses 2,270,000 870,000 Operating income $ 530,000 $ 530,000Explanation / Answer
High Teck Old Time A Sale 3500000 3500000 B Variable 700000 2100000 A-B=C Contribution Margin 2800000 1400000 80 D Fixed Expense 2270000 870000 C-D=E Operating Income 530000 530000 Working Contribution Margin Ratio (C/A*100) 80 40 a Break Even point 2270000/80% 870000/40% (Fixed Expense/Cont Margin Ratio) 2837500 2175000 b The breakeven point for each firm is different because each firm has a different amount of fixed costs to be recovered. c1 and c2 Increase in sale by 20% decrease in sale by 20% High Teck Old Time High Teck Old Time Given Sale 3500000 3500000 3500000 3500000 Increase/(Decrease) 20% 700000 700000 -700000 -700000 Sale 4200000 4200000 2800000 2800000 Variable (Sale-Cont Margin) 840000 2520000 560000 1680000 Contribution Margin (Sale*Cont Margin 80 and 40) 3360000 1680000 2240000 1120000 Fixed Expense (Same) 2270000 870000 2270000 870000 Operating Income 1090000 810000 -30000 250000 d 2015 Increase 20% Decrease 20% High Teck 530000 1090000 -30000 Old Time 530000 810000 250000 Increase/Decrease High Teck (1090000-530000)/530000 (-30000-530000)/530000 Old Time (810000-530000)/530000 (250000-530000)/530000 High Teck %increase/(Decrease) 105.66 -105.66 Old Time %increase/(Decrease) 52.83 -52.83 e HighTech, Inc. has significantly more operating leverage than does OldTime Co. because its fixed costs are much higher and its contribution margin ratio is also much higher. f High Teck Old Time Cont Margin 2800000 1400000 Operating Income 530000 530000 Ratio of contribution margin to Operating income 5.28 2.64 (Cont Margin/Op Income)
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