Question

Check my wor Problem 17-17 Your business plan for your proposed start-up firm envisions first-year revenues of $90,000, fixed costs of $30,000, and variable costs equal to one-third of revenue. a. What are expected profits based on these expectations? Expected profit b. What is the degree of operating leverage based on the estimate of foued costs and expected profits? (Round your answer to 2 decimal places.) Degree of operating leverage c. sales are on below expectation, what will be the percentage decrease in profits? < Prev 7 of 14 Next > V

Answer 1

Answer:

	Revenues	90000
Less	Variable Cost (one third of revenue)	30000
	Contribution	60000
Less	Fixed Cost	30000
	EBIT	30000

(b) Degree of Operating Leverage = Contribution/ EBIT

                                       DOL = 60000/ 30000 = 2

DOL = 3

(C) If Sales are below 10% expectations then profit will decline to $24000.

	Revenue	81000
Less	Variable Cost (one third of revenue)	27000
	Contribution	54000
Less	Fixed Cost	30000
	EBIT	24000

Therefore, % change in profit = (24000-30000)/30000 *100 = -20%

Profit will decline by 20%

(e) The largest possible downfall in sales is 50% at which the profit will decline by 100% and will come to zero. Beyond that, still if sales go down, there will be losses.

(f) At Break Even Point

Sales = Fixed Cost + Variable Cost

Let us supposed sales is S then:

S = 30000 + S/3                    ( Variable cost is one third of sales/revenue)

then 2/3 S = 30000

S = $ 45000