IClub, Inc and SimplyWell,Inc. compete within the same industry and had the foll
ID: 2354828 • Letter: I
Question
IClub, Inc and SimplyWell,Inc. compete within the same industry and had the following operating results in 2010.iClub, Inc.
Sales.................................$2,100,000
Variable Expenses....................$420,000
Contribution Margin...............$1,680,000
Fixed Expenses.....................$1,470,000
Operating Income....................$210,000
SimplyWell, Inc.
Sales.................................$2,100,000
Variable Expenses..................$1,260,000
Contribution Margin..................$840,000
Fixed Expenses........................$630,000
Operating Income.....................$210,000
A.) Calculate the break-even point for each firm in terms of revenue
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 2010.
C.) Calculate the amount of operating income (or loss) that you would expect each firm to report in 2011 if sales were to:
1.) Increase by 20%.
2.) Decrease by 20%.
D.) Using the amounts in C, calculate the increase or decrease in the amount of operating income expected in 2011 from the amount reported in 2010.
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 2010. (Hint: Divide the Contribution Margin by operating income)
G.) Multiply the expected increase in sales of 20% for 2011 by the ratio of contribution margin to operating income for 2010 computed in Requirement F for each firm. (Hint: Multiply your answer in Requirement F by 0.2).
H.) Multiply your answer in Requirement G by the operating income of $210,000 reported in 2010 for each firm.
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 Requirements F,G and H?
Explanation / Answer
A. Break even point: Iclub INC: Iclub INC: Break even point = Fixed costs / contribution margin ratio Contribution margin ratio = Contribution margin per unit / Unit selling price Here, Contribution margin ratio = $1,680,000 / $2,100,000 x 100 = 80% Break even point = $1,470,000 / 80% Break even point = $1,837,500 SimplyWell, Inc: Contribution margin ratio = $840,000 / $2,100,000 X 100 = 40% Break even point = $630,000 / 40% Break even point = $1,575,000. Contribution margin ratio = $840,000 / $2,100,000 X 100 = 40% Break even point = $630,000 / 40% Break even point = $1,575,000. B. Break even point of Iclub INC is $1,837,500 where the sales of the concern is $2,100,000.The Higher contribution margin of the concern $1,680,000 lead to the higher contribution margin ratio of 80%. Break even point of SimplyWell, Inc is $1,575,000 where the sales of the concern is $2,100,000. The lesser contribution margin of the concern $840,000 lead to the lesser contribution margin ratio of 40%. Yet their operating incomes are equal since the 1st company incurring less in variable high in fixed and the second company incurring high in variable and less in fixed. C.1. Operating Income when there is 20% increase in sales: Iclub INC: Actual sales = $2,100,000 Increased sales = $2,520,000 Variable exprenses for $2,100,000 sales = $1,260,000 Variable exprenses for $1 sales ($1,260,000 / 2,100,000) = $0.6 Variable expenses for $2,520,000 sales ($2,520,000 x 0.6) = $1,512,000
So now, sales = $2,520,000 Variable expenses = $1,512,000
Contribution margin = $1,008,000 Fixed cost = $1,470,000 Operating income = $546,000 SimplyWell, Inc: Actual sales = $2,100,000 Increased sales = $2,520,000 Variable exprenses for $2,100,000 sales = $420,000 Variable exprenses for $1 sales ($420,000 / 2,100,000) = $0.2 Variable expenses for $2,520,000 sales ($2,520,000 x 0.2) = $504000
So now, sales = $2,520,000 Variable expenses = $504,000
Contribution margin = $2,016,000 Fixed cost = $630,000 Operating income = $378,000 2. Operating results when there is 20% decrease in sales: Iclub INC: Actual sales = $2,100,000 Decreased sales = $1,680,000 Variable exprenses for $2,100,000 sales = $1,260,000 Variable exprenses for $1 sales ($1,260,000 / 2,100,000) = $0.6 Variable expenses for $1,680,000 sales ($1,680,000 x 0.6) = $1,008,000
So now, sales = $1,680,000 Variable expenses = $1,008,000
Contribution margin = $672,000 Fixed cost = $1,470,000 Operating loss = $-798,000 SimplyWell, Inc: Actual sales = $2,100,000 Decreased sales = $1,680,000 Variable exprenses for $2,100,000 sales = $420,000 Variable exprenses for $1 sales ($420,000 / 2,100,000) = $0.2 Variable expenses for $1,680,000 sales ($1,680,000 x 0.2) = $336,000
So now, sales = $1,680,000 Variable expenses = $336,000
Contribution margin = $1,344,000 Fixed cost = $630,000 Operating income = $714,000. Actual sales = $2,100,000 Increased sales = $2,520,000 Variable exprenses for $2,100,000 sales = $420,000 Variable exprenses for $1 sales ($420,000 / 2,100,000) = $0.2 Variable expenses for $2,520,000 sales ($2,520,000 x 0.2) = $504000
So now, sales = $2,520,000 Variable expenses = $504,000
Contribution margin = $2,016,000 Fixed cost = $630,000 Operating income = $378,000 2. Operating results when there is 20% decrease in sales: Iclub INC: Actual sales = $2,100,000 Decreased sales = $1,680,000 Variable exprenses for $2,100,000 sales = $1,260,000 Variable exprenses for $1 sales ($1,260,000 / 2,100,000) = $0.6 Variable expenses for $1,680,000 sales ($1,680,000 x 0.6) = $1,008,000
So now, sales = $1,680,000 Variable expenses = $1,008,000
Contribution margin = $672,000 Fixed cost = $1,470,000 Operating loss = $-798,000 SimplyWell, Inc: Actual sales = $2,100,000 Decreased sales = $1,680,000 Variable exprenses for $2,100,000 sales = $420,000 Variable exprenses for $1 sales ($420,000 / 2,100,000) = $0.2 Variable expenses for $1,680,000 sales ($1,680,000 x 0.2) = $336,000
So now, sales = $1,680,000 Variable expenses = $336,000
Contribution margin = $1,344,000 Fixed cost = $630,000 Operating income = $714,000. 2. Operating results when there is 20% decrease in sales: Iclub INC: Actual sales = $2,100,000 Decreased sales = $1,680,000 Variable exprenses for $2,100,000 sales = $1,260,000 Variable exprenses for $1 sales ($1,260,000 / 2,100,000) = $0.6 Variable expenses for $1,680,000 sales ($1,680,000 x 0.6) = $1,008,000
So now, sales = $1,680,000 Variable expenses = $1,008,000
Contribution margin = $672,000 Fixed cost = $1,470,000 Operating loss = $-798,000 SimplyWell, Inc: Actual sales = $2,100,000 Decreased sales = $1,680,000 Variable exprenses for $2,100,000 sales = $420,000 Variable exprenses for $1 sales ($420,000 / 2,100,000) = $0.2 Variable expenses for $1,680,000 sales ($1,680,000 x 0.2) = $336,000
So now, sales = $1,680,000 Variable expenses = $336,000
Contribution margin = $1,344,000 Fixed cost = $630,000 Operating income = $714,000. Iclub INC: Actual sales = $2,100,000 Decreased sales = $1,680,000 Variable exprenses for $2,100,000 sales = $1,260,000 Variable exprenses for $1 sales ($1,260,000 / 2,100,000) = $0.6 Variable expenses for $1,680,000 sales ($1,680,000 x 0.6) = $1,008,000
So now, sales = $1,680,000 Variable expenses = $1,008,000
Contribution margin = $672,000 Fixed cost = $1,470,000 Operating loss = $-798,000 SimplyWell, Inc: Actual sales = $2,100,000 Decreased sales = $1,680,000 Variable exprenses for $2,100,000 sales = $420,000 Variable exprenses for $1 sales ($420,000 / 2,100,000) = $0.2 Variable expenses for $1,680,000 sales ($1,680,000 x 0.2) = $336,000
So now, sales = $1,680,000 Variable expenses = $336,000
Contribution margin = $1,344,000 Fixed cost = $630,000 Operating income = $714,000. D. Changes in operating income: I Club INC Operating Income in 2010 = $210,000 I Club INC Operating Income in 2010 = $210,000 Operating loss in 2011 = $-798,000 Decrease in net income = ($1,008,000) SimplyWell INC Operating Income in 2010 = $210,000 Operating income in 2011 = $714,000 Increase in net income = $504,000 SimplyWell INC Operating Income in 2010 = $210,000 Operating income in 2011 = $714,000 Increase in net income = $504,000 SimplyWell INC Operating Income in 2010 = $210,000 Operating income in 2011 = $714,000 Increase in net income = $504,000 E. Due to the Break even point sales requirements the net income of the I Club INC decreased. The break even sales required for this company is $1,837,500 but the sales decreased to $1,680,000, this caused the decrease in net income. Vice-versa.