Accounting problem and solution

CASE    C12.26

SUBMITTED BY:  Dinesh Siwakoti

ACC 512-

MANAGERIAL ACCOUNTING

A.

Breakeven point for High Tech Inc. = fixed cost/contribution margin ratio

Contribution Margin Ratio=Contribution Margin/Revenue

                                             =1,680,000/2,100,000

                                             =80%

BEP for High Tech Inc. =1,470,000/.8

                                       =1,837,500

Breakeven point for Old time Co. =fixed cost/contribution margin ratio

Contribution margin ratio=contribution margin/revenue

                                             =840,000/2,100,000

                                             =40%

BEP for Old Time Co. =630,000/.4

                                       =1,575,000

B.

 Examining the break-even point of both firms we can draw that high-tech have to make more revenues to make profit as their BEP is higher than that of the Old time Co. similarly we can also draw that the Old times Co has earned more profit than the High tech Inc. BEP is the point which determines the point that firm must realize to be in the position of neither loss or profit.

C.  

Amount of operating income/loss=?

C.1.

 Sales increase by 20%

Operating income for high tech inc. =.8*420,000+210,000

                                                              =546,000

Operating income for Old time Co. =.4*420,000+210,000

                                                             =378,000

C2.

If Decrease by 20%

Operating income for high tech inc. =.8*420,000-210,000

                                                              =126,000

Operating loss for Old time Co. = 4*420,000-210,000

                                                       = (42,000)

D.

D1.

Sales increase by 20%

Increase in Operating income for high tech inc. =546,000-210,000

                                                                                    =336,000

Increase in Operating income for Old time Co. =378,000-210,000

                                                                                  =168,000

D2.

Decrease by 20%

Decrease in Operating income for high tech inc. = 210,000-126,000

                                                                                     =84,000

Increase in Operating loss for Old time Co. =210,000+42,000

                                                                            =252,000

E.

 Regardless of an equal percentage increase or decrease in sales for each firm, the operating income for both of the firm are different because the fixed cost expense and variable cost of the firms are different .

F.

Ratio of contribution margin to operating income of 2008 for high tech inc. =Contribution margin/operating income

                                   =1,680,000/210,000

                                  =8:1

Ratio of contribution margin to operating income of 2008 for Old time co. =Contribution margin/operating income

                                   =840,000/210,000

                                  =4:1

G.

 High Tech inc. = 336,000*8*.2

                         =5, 37,600

Old Time Co. =168,000*4*.2

                      =134,400

H.

 High Tech Inc. =5, 37,600*210,000

                           =112896000000

Old Time Inc. =134,400*210,000

                      =28224000000

   I.                

Variable expenses and contribution margin will change proportionately. The presence of fixed expense which don’t change as volume of activity change means that the operating income will change proportionately more than the change in revenues. A small percentage decline in revenues will cause a relatively larger percentage decline in operating income. The higher a firm’s contribution margin ratio, the greater its operating leverages.