Question

1. Using the following data, determine the following for each firm:
   1. Break even points in terms of units
   2. Margin of Safety
   3. Operating Leverage

ABC, Inc               XYZ, Inc

Tax Rate	20%		15%
Units Sold	5000		5000
Sales	$300,000		$300,000
Variable Costs	$180,000		$60,000
Contribution M
Fixed Costs	$75,000		$195,000
Operating Income

4. Determine number of units to be sold to reach a profit of $95,000 after taxes.

5. Explain why one firm must sell more units to reach the $95,000 after-taxes target profit despite having a lower break-even point.

Answer 1

			ABC	XYZ
Sales revenue		300000	300000
less: variable cost		180000	60000
Contribution margin		120000	240000
Less: Fixed cost		75000	195000
Net Income		45,000	45000
Contribution margin per unit	24	48
			(120000/5000)	(240000/5000)
Break even point:
Fixed cost			75000	195000
Divide: Contributio margin per unit	24	48
Break even point:		3125	4063
Margin of safety
Totalsales units		5000	5000
Less: Break even units	3125	4063
Margin of safety		1875	937
Operating Leverage
Contribution margin		120000	240000
Divide: Net income		45000	45,000
Operating Leverage		2.67	5.33
Target sales units
After tax profits		95000	95000
Before tax profits		118750	111764.7
			(95000/80%)	(95000/85%)
Divide: Contribution margin per unit	24	48
Target sales units		4948	2329
This is due to High operating leverage.