(a)
To compute:
The percentage decline in sales, if the economy enters a recession, for the Ocean gate who sells hard drives for
Introduction:
Operating leverage means a relationship between fixed and variable costs. A business which has a higher contribution margin and lower variable cost have high operating leverage.
If the economy enters s recession, then, the prices of product get high and sales starts a decline.
Answer to Problem 27PS
The percentage decline in sales is
Explanation of Solution
Given:
At the time of recession, it will sell only half of the sale volume.
Sales in a strong economy is
Sales in recession is
Sale price per unit is
If the economy enters a recession, then, the prices of product get high and sales starts declining.
Here,
In a recession,
In a strong economy,
Hence,
So, percentage decline in sales is
(b)
To determine:
The percentage decline in sales, if the economy enters a recession, for the Ocean gate who sells hard drives for
Introduction:
Operating leverage means a relationship between fixed and variable costs. A business which has a higher contribution margin and lower variable cost have high operating leverage.
The economy drops down at the time of recession. So, the profit with high operating leverage firm will reduce drastically.
Answer to Problem 27PS
The percentage decline in profits is
Explanation of Solution
Given:
At the time of recession, it will sell only half of the sale volume.
Sales in a strong economy is
Sales in recession is
Sale price per unit is
Variable cost per unit is
Fixed Cost is
Corporate tax is
If the economy enters recession prices of product gets high and profit will get reduced.
Here,
In a recession economy,
In a strong economy,
Now,
So, percentage decline in profit is
(c)
To determine:
By comparing decline in sales and decline in profits, measure the operating leverage of the Ocean gate who sells hard drives for
Introduction:
Operating leverage means a relationship between fixed and variable costs. A business which has a higher contribution margin and lower variable cost have high operating leverage.
Answer to Problem 27PS
The operating leverage of the firm is high as change in profit is higher than the change in sales.
Explanation of Solution
So, operating leverage of firm is 2
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Chapter 17 Solutions
EBK INVESTMENTS
- 2. Company XYZ sells CDs. The price of its new CD is $15. Fixed costs are $1,500,000 per year. Variable costs are $9. The company expects to sell 300,000 units this year. a. How many DVDS will the company need to sell to break even? b. If the forecasts are correct, how much will company XYZ make or lose this year (before taxes)?arrow_forwardTara’s Textiles currently has credit sales of $360 million per year and an average collection period of 60 days. Assume that the price of Tara’s products is $60 per unit and that the variable costs are $55 per unit. The firm is considering an accounts receivable change that will result in a 20% increase in sales and a 20% increase in the average collection period. No change in bad debts is expected. The firm’s equal-risk opportunity cost on its investment in accounts receivable is 14%. (Note: Use a 365-day year.) Calculate the additional profit contribution from sales that the firm will realize if it makes the proposed change. What marginal investment in accounts receivable will result? Calculate the cost of the marginal investment in accounts receivable. Should the firm implement the proposed change? What other information would be helpful in your analysis?arrow_forwardGary’s Pipe and Steel company expects sales next year to be $910,000 if the economy is strong, $655,000 if the economy is steady, and $376,000 if the economy is weak. Gary believes there is a 10 percent probability the economy will be strong, a 55 percent probability of a steady economy, and a 35 percent probability of a weak economy. What is the expected level of sales for next year?arrow_forward
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- EBK CONTEMPORARY FINANCIAL MANAGEMENTFinanceISBN:9781337514835Author:MOYERPublisher:CENGAGE LEARNING - CONSIGNMENT