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A service company has the following financial information (in millions of $) Sales $ 510 Cost...

A service company has the following financial information (in millions of $)

Sales $ 510
Cost of outsourced facilitating goods 210
Cost of in-house services provided 199
Administrative costs 77
Pretax earnings 24


(Round answers to 1 decimal place.)


a. What is the profit leverage effect of reducing the cost of the facilitating goods in this company?





b. It has been suggested that the in-house services costs could be reduced by 10 percent in the coming year by implementing lean systems. What effect would this have on earnings increase in percentage?


c. What is the profit leverage effect of in-house services relative to profits?

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Answer #1

SOLUTION (A) CALCULATING PROFIT LEVERA 4€ EFPACT OF REDULING THE COIT OP THE FACILITATING 4000$ IN THE COMPANY - PRETAX EARNI(B) CALCULATING PERCENTAGE IN REASE IN EARNING IF IN- House SERVICES COST REDUCE BY to PERCENT - (COST of Out Source O FACILI() CALCULATING PROFIT LEVERAGE EFFECT OF IN- House Services RELATNE TO PROFITS = INCREASE IN EARNINY FERIENTALE - Profit LEVE

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