In presenting the Analysis discuss the following topics in separate sections • P
ID: 2451985 • Letter: I
Question
In presenting the Analysis discuss the following topics in separate sections
• Problem at Issue:
• Key assumptions:
• Quality of evidence:
• Conclusion;
You need to understand and use the DOL (Degree of Leverage) calculation. Calculate the DOL for 2011 and 2012 to explain the 20% decline in profit from a 10% decline in sales. Also, show an Income Statement for 2013 if the following changes happened:
• Sales decline again by 10%
• By cutting wastage, costs can be reduced by $120,000
• Calculate the DOL for 2013
CASE 2 Roxbury Manufacturing Company by Khursheed Omer Roxbury Manufacturing Company is a privately owned business. Products manufactured by Roxbury had been doing very well until the year 2011. The last two years have seen a steady decline in sales and profit. If this declining trend continues, the company might come under financial distress. Income statements for the last two years are given below.
Year 1 Percent Year 2 Percent
Sales $ 4,000,000 100 $ 3,600,000 100
Less Variable Expenses $ 3,000,000 75 $ 2,700,000 75
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Total Contribution Margin $ 1,000,000 25 $ 900,000 25
Less Fixed Expenses $ 500,000 $ 500,000
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Net Income before taxes $ 500,000 $ 400,000
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Mr. Creighton, the owner of the company is baffled that only a ten percent decline in sales has resulted in a twenty percent decline in profits. He asks you to explain to him how in spite of maintaining efficiency in operations by keeping variable expenses and contribution margin at the same percentage level, he has experienced a greater percentage decline in profits.
Explanation / Answer
The decline in profits are related to the contribution margin, the sales has declined by $400,000 and the contribution margin is 25%, so it will have a overall impact of $400,000 * 25% = 100,000
as the amount of decline in sales and the amount of contribution is not equal which is causing the gap betwwen the decline in sales and profits.
IF there have been no variable cost than the contribution margin ratio would have been 100% , thus it would be directly co related with sales.