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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: Answer with complete solutions a) What is Ticktock's degree of operating leverage at sales of 12,000 watches? b) If Ticktock's sales will increase by 5%, what would be the percentage of change in profits?
a) Degree of Operating Leverage = Contribution Margin / Net Income Total Sales = 12,000 x 1,500 = 18,000,000 Total Variable Cost = 12,000 x 900 = 10,800,000 Contribution Margin = 18,000,000 - 10,800,000 = 7,200,000 Net Income = 7,200,000 - 3,600,000 = 3,600,000 Degree of Operating Leverage = 7,200,000 / 3,600,000 = 2 b) If sales will increase by 5%, total sales will increase by 5% from 18,000,000 to 18,900,000. Total Variable Cost = 18,900,000 x 900 = 17,010,000 Contribution Margin = 18,900,000 - 17,010,000 = 1,890,000 Net Income = 1,890,000 - 3,600,000 = -1,710,000 Percentage Change in Profits = -1,710,000 / 3,600,000 x 100 = -47.5%
Jan. 23, 2023, 7:55 a.m.
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