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Question: The Ticktock Watch Company manufactures a line of ladies watches which are sold through discount houses. Each watch is sold for P1,500; the fixed costs are P3,600,000 for 30,000 watches or less; variable cost is P900 per watch. Required: a) What is Ticktock's degree of operating leverage at sales of 12,000 watches? answer with solution b) If Ticktock's sales will increase by 5%, what would be the percentage of change in profits?
Answer a) Degree of Operating Leverage = (Total Contribution Margin / Total Operating Income) Total Contribution Margin = (12,000 x P1,500) - (12,000 x P900) = P9,000,000 Total Operating Income = P9,000,000 - P3,600,000 = P5,400,000 Degree of Operating Leverage = P9,000,000 / P5,400,000 = 1.67 Answer b) Percentage of Change in Profits = (New Profit - Old Profit) / Old Profit New Profit = (30,000 x P1,500) - (30,000 x P900) = P20,100,000 Old Profit = (24,000 x P1,500) - (24,000 x P900) = P16,200,000 Percentage of Change in Profits = (P20,100,000 - P16,200,000) / P16,200,000 = 24.1%
Jan. 23, 2023, 8:10 a.m.
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