I realize that this is question is already posted on Chegg, but I have no clue w
ID: 2574984 • Letter: I
Question
I realize that this is question is already posted on Chegg, but I have no clue where the numbers are coming from..
You are considering buying one of two local firms (Olson Corp. and Miami Inc.). Olson Corp uses a substantial amount of direct labor in its manufacturing operations, and its salespeople work on commission. Miami Inc. uses the latest automated technology in manufacturing; its salespeople are salaried. The following financial information is available for the two companies OLSON CORP MIAMI INC 2013 2014 2013 2014 Sales S 600,000 960,000 $600,000 840,000 Expenses including taxes (528,000) (823,200) (528,000) 667,200) S 72000 136800 72,000$ 172800 Net income After examining cost data, you find that the fixed cost for Olson Corp. is $60,000; the fixed cost for Miami Inc. is $300,000. The tax rate for both companies is 40 percent. a. Recast the income statements into a variable costing format. b. What are the break-even sales for each firm for each year? (Round to the next highest whole dollar.) c. Assume that you could acquire either firm for $1,200,000, and you want an after tax return of 12 percent on your investment. Determine what sales level for each firm would allow you to reach your goal d. What is the margin of safety for each firm for each year? What is the degree of operating leverage? e. Assume that product demand for 2015 is expected to rise by 15 percent from the 2014 level What will be the expected net income for each firm? f. Assume that product demand for 2015 is expected to fall by 20 percent from the 2014 level. What will be the expected net income for each firm? g. Prepare a profit-volume graph for each firm.Explanation / Answer
OLSON CORP. MIAMI INC, 2013 2014 2013 2014 Remarks a Sales $600,000 $960,000 $600,000 $840,000 Variable Cost $420,000 $672,000 $180,000 $252,000 Working 1 Cobntribution Margin $180,000 $288,000 $420,000 $588,000 Fixed Cost $60,000 $60,000 $300,000 $300,000 Net Operating Income $120,000 $228,000 $120,000 $288,000 Tax $48,000 $91,200 $48,000 $115,200 Working 2 Net Income $72,000 $136,800 $72,000 $172,800 OLSON CORP. MIAMI INC, 2013 2014 2013 2014 Working 1 Total Expenses with Tax $528,000 $823,200 $528,000 $667,200 Less - Tax $48,000 $91,200 $48,000 $115,200 Total Expenses without Tax $480,000 $732,000 $480,000 $552,000 Less - Fixed Cost $60,000 $60,000 $300,000 $300,000 Variable Cost $420,000 $672,000 $180,000 $252,000 OLSON CORP. MIAMI INC, 2013 2014 2013 2014 Working 2 Net Income After Tax $72,000 $136,800 $72,000 $172,800 Tax @40% $48,000 $91,200 $48,000 $115,200 Net income before Tax $120,000 $228,000 $120,000 $288,000 OLSON CORP. MIAMI INC, b Break Even Sales 2013 2014 2013 2014 Total Fixed Cost $60,000 $60,000 $300,000 $300,000 Contribution Margin Required $60,000 $60,000 $300,000 $300,000 Equal to Fixed Cost Contribution Margin (% of Sales) 30% 30% 70% 70% From answer a Sales Required for Break Even $200,000 $200,000 $428,571 $428,571 c Investment proposed $1,200,000 After Tax Return 12% Return in $ $144,000 OLSON CORP. MIAMI INC, 2013 2014 2013 2014 Net Profit Required After Tax $144,000 $144,000 $144,000 $144,000 Tax @ 40% $96,000 $96,000 $96,000 $96,000 Net profit before Tax $240,000 $240,000 $240,000 $240,000 Fixed Cost $60,000 $60,000 $300,000 $300,000 Contribution Margin Required $300,000 $300,000 $540,000 $540,000 Contribution Margin (% of Sales) 30% 30% 70% 70% Sales Required $1,000,000 $1,000,000 $771,429 $771,429 d Margin of Safety OLSON CORP. MIAMI INC, 2013 2014 2013 2014 Sales $600,000 $960,000 $600,000 $840,000 Break Even Sales $200,000 $200,000 $428,571 $428,571 Margin of Safety $400,000 $760,000 $171,429 $411,429 Degree of Operating Levergae OLSON CORP. MIAMI INC, 2013 2014 2013 2014 EBIT $120,000 $228,000 $120,000 $288,000 Sales $600,000 $960,000 $600,000 $840,000 % change in EBIT 90% 140% % change in Sales 60% 40% DOL 1.5 3.5 Degree of Operating Leverage = % change on EBIT / % Change in Sales e OLSON CORP. MIAMI INC, 2014 2015 2014 2015 Sales $960,000 $1,104,000 $840,000 $966,000 Sales of 2015 increases by 15% Variable Cost $672,000 $772,800 $252,000 $289,800 Variable Cost of 2015 increases by 15% Cobntribution Margin $288,000 $331,200 $588,000 $676,200 Fixed Cost $60,000 $60,000 $300,000 $300,000 Net Operating Income $228,000 $271,200 $288,000 $376,200 Tax $91,200 $108,480 $115,200 $150,480 Net Income $136,800 $162,720 $172,800 $225,720 f OLSON CORP. MIAMI INC, 2014 2015 2014 2015 Sales $960,000 $768,000 $840,000 $672,000 Sales of 2015 decreases by 20% Variable Cost $672,000 $537,600 $252,000 $201,600 Variable cost of 2015 decreases by 20% Cobntribution Margin $288,000 $230,400 $588,000 $470,400 Fixed Cost $60,000 $60,000 $300,000 $300,000 Net Operating Income $228,000 $170,400 $288,000 $170,400 Tax $91,200 $68,160 $115,200 $68,160 Net Income $136,800 $102,240 $172,800 $102,240