Question

Problem 3.52 Elina Siljander owns Elina's Stained Glass in Helsinki, Finland. The business produces and sells three different types of stained glass windows: small, medium, and large. Elina has two full-time employees who work regular schedules to cut glass and assemble the windows. She borrowed money from the bank to start the business and pay living expenses. She is concerned that her cash flows might not be high enough either to pay herself or to repay the bank loan. She would like to generate approximately €10,000 in pretax earnings each month to cover her living expenses and repay the loan. The following revenue and cost information covers the past four months June July August September €9,050 €10,531 €12,946 €16,116 Revenues Raw materials and supplies Labour Rent Miscellaneous Profit 1,745 3,880 2,000 525 €900 2,433 4,041 2,000 701 €1,356 3,074 4,246 2,000 747 €2,879 4,029 4,282 2,200 793 €4,812 Develop a cost function for Elina's Stained Glass. (Round answers to o decimal places, e.g. 15 or 15%.) Cost function: Total Costa % of revenues LINK TO TEXT LINK TO TEXT LINK TO TEXT LINK TO TEXT LINK TO TEXT Determine the level of revenue Elina's Stained Glass must generate to achieve the targeted profit of €10,000 per month. (Round answer to 0 decimal places, e.g. 125.) Level of revenue for targeted profiter LINK TO TEXT LINK TO TEXT LINK TO TEXT LINK TO TEXT LINK TO TEXT Calculate Elina's degree of operating leverage for September. (Round to 2 decimal places, e.g. 15.25.) Degree of operating leverage LINK TO TEXT LINK TO TEXT LINK TO TEXT LINK TO TEXT LINK TO TEXT

Answer 1

Total Cost function = Fixed cost + variable cost

Fixed cost = rent

= €2,000

Variable cost is computed as a percentage of revenues

variable cost = Raw materials and supplies + Labour + Miscellaneous

June

variable cost = 1,745+3,880+525

= €6,150

revenue = €9,050

variable cost percentage on revenue = 6,150/9,050

= 68 % ( rounded off )

July

variable cost = 2,433+4,041+701

= 7,175

Revenue = €10,531

variable cost percentage on revenue = 7,175/10,531

= 68% ( variable cost ratio )

So, variable cost establish a relationship that is 68 % of revenue

Total cost function = €2,000 + 68 % of revenue

Level of revenue for target profit = (Fixed cost + desired profit) / p/v ratio

p/v ratio = 100 - variable cost ratio

= 100-68

= 32 %

Level of revenue for target profit = 2,000+ 10,000/ 32%

= €37,500

Degree of operating leverage for September = % change in earning before interest and taxes / % change in revenues

Profit in this question is before tax and interest so, it is earning before interest and taxes and Change will be calculated by deducting August month figures from September month

% change in earning before interest and taxes = (4812- 2879)/2879

= 67% ( rounded off )

% change in revenue = (16116-12946)/12946

=24 % (rounded off )

Degree of operating leverage = 67 % / 24%

= 2.79 ( rounded off )