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(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
INVESTMENTS(LL)W/CONNECT
- Your company wants to decide between Investment A, which will cost $100K upfront, and Investment B, which will cost $150K upfront. If the economy performs well, Investment A will bring in $750K for your company, but if the economy performs poorly, then it will lose $250K for your company. If the economy performs well, Investment B will bring in $850K for your company, but if the economy performs poorly, then it will lose $300K for your company. There’s a 60% chance of a strong market and a 40% chance of a weak market. Assuming your company is risk-neutral, which option should you choose?arrow_forwardJohnson Electronics is considering extending trade credit to some customers previously considered poor risks. Sales would increase by $270,000 if credit is extended to these new customers. Of the new accounts receivable generated, 9 percent will prove to be uncollectible. Additional collection costs will be 6 percent of sales, and production and selling costs will be 75 percent of sales. 1. Compute the incremental income before taxes. 2. What will the firm’s incremental return on sales be if these new credit customers are accepted? (Round final answer to 2 decimals) 3. If the receivable turnover ratio is 5 to 1, and no other asset buildup is needed to serve the new customers, what will Johnson Electronics’ incremental return on new average investment be? (Round only the final answer to %)arrow_forwardThe Warren Watch Company sells watches for $26, fixed costs are$155,000, and variable costs are $13 per watch.a. What is the firm’s gain or loss at sales of 9,000 watches? At 15,000 watches?b. What is the break-even point? Illustrate by means of a chart.c. What would happen to the break-even point if the selling price was raised to $33?What is the significance of this analysis?d. What would happen to the break-even point if the selling price was raised to $33 butvariable costs rose to $24 a unit?arrow_forward
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EBK CONTEMPORARY FINANCIAL MANAGEMENTFinanceISBN:9781337514835Author:MOYERPublisher:CENGAGE LEARNING - CONSIGNMENT