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# Lowell Inc. and Tuscan Time

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Lowell Inc. and Tuscan Time operate in the same industry and had the following operating results in 2007.

Sales = \$2,100,000, \$2,100,000
Variable Expenses = \$420,000, \$1,260,000
Contribution Margin = \$1,680,000, \$840,000
Fixed Expenses = \$1,470,000, \$630,000
Operating Income = \$210,000, \$210,000

a. Calculate the break-even point for each firm in terms of revenue
b. What observations can you draw by examining the break-even point of each firm given that they earned an equal amount of operating income on identical sales volumes in 2007?
c. Calculate the amount of operating income (or loss) that you would expect each firm to report in 2008 if sales were to: 1) Increase by 20% 2) Decrease by 20%
d. Using the amounts computed in requirement c above, calculate the increase or decrease in the amount of operating income expected in 2008 from the amount reported in 2007.
e. explain why an equal percentage increase (or decrease) in sales for each firm would have such differing effects on operating income.
f. Calculate the ratio of contribution margin to operating income for each firm in 2007.
g. Multiply the expected increase in sales of 20% for 2008 by the ratio of contribution margin to operating income for 2007 computed in requirement f for each firm.
h. Multiply your answer in requirement g by the operating income of \$210,000 reported in 2007 for each firm.
i. Compare your answer in requirement h with your answer in requirement d. what conclusions can you draw about the effects of operating leverage from the steps you performed in requirements f,g, and h?

#### Solution Preview

Lowell Inc. and Tuscan Time operate in the same industry and had the following operating results in 2007.

Lowell Tuscan Time

Sales = \$2,100,000, \$2,100,000
Variable Expenses = \$420,000, \$1,260,000
Contribution Margin = \$1,680,000, \$840,000
Fixed Expenses = \$1,470,000, \$630,000
Operating Income = \$210,000, \$210,000

a. Calculate the break-even point for each firm in terms of revenue

Lowell

Break-even point in dollars = Fixed Expenses/(Contribution Margin/Sales)
= 1,470,000/(1,680,000/2,100,000)
= 1,837,500

Tuscan Time

Break-even point in dollars = Fixed Expenses/(Contribution Margin/Sales)
= 630,000/(840,000/2,100,000)
= 1,575,000

b. What observations can you draw by examining the break-even point of each firm given that they earned an equal amount of operating income on identical sales volumes in 2007?

We can see that even though ...

#### Solution Summary

This solution is comprised of a detailed explanation to calculate the break-even point for each firm in terms of revenue.

\$2.19