Ch10.Answers - operating profit changes by...

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Chapter 10 Answers 1. The statement is correct because some operating and financing costs are fixed. Hence, as revenues increase, costs increase at a lower rate. The lower rate of increase in costs causes operating profit and net income to increase disproportionately. The greater the percentage of fixed cost embedded in the firm’s cost structure, the greater will be the disproportionate growth of the profitability measures. 2. There are many possibilities – timed heating/cooling systems in commercial buildings, self-checkout at Wal-Mart, ATMs, check-in kiosks at airports, pay-at- the-pump gasoline stations, automatic car wash machines, etc. 3. By definition, business risk is the variability in operating profit/EBIT. 4. An indirect expense that is NOT RELATED TO QUANTITY is a fixed cost. 5. DOL measures the relationship between the percentage change in EBIT and the percentage change in revenue. In this case, revenue changes by 15% while
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Unformatted text preview: operating profit changes by 24.58% ([97,175-78,000]/78,000). Comparing the two, a 24.58% change in EBIT is caused by a 15% change in revenue, so the DOL must be .2458/.15 = 1.64. 6. DFL is calculated as: EBIT/ (EBIT – I). Given the data in the problem, we have: DFL = $10MM/($10MM-$2MM) = 1.25 7. The contribution margin for the product is $16-$11 = $5 (i.e., revenue minus variable cost). Hence, the break-even can be calculated as FC/contribution margin, or $800,000/5 = 160,000. The company covers its fixed operating cost when it sells 160,000 units. 8. Revenue minus EBIT = total operating cost; so total operating costs are $12,780,000. Since $4,780,000 is fixed operating cost, the remainder of $8,000,000 must be variable operating cost. The calculations are: DOL = Sales –VC / EBIT = (18MM-8MM) / 5.22MM = 1.92 DFL = EBIT/EBIT-I = 5.22MM/(5.22- .85MM) = 1.19 CDL = DOL x DFL = 1.92 x 1.19 = 2.28...
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