Operating Leverage and Break Even Point
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Exercises
EXERCISE 4-1. Operating Leverage [LO 5] John Diaz owns Pacific Electric, a large electrical contracting firm that provides services to building construction projects. The company has 2,000 employees and operates in three western states. Recently the company experienced large losses due to a downturn in the economy and a slowdown in construction. John thinks the losses were particularly large because his company has too much fixed cost.
Required
a. Expand on Johnâ's thought. How are the large losses related to fixed costs?
b. Identify a way that John can turn potential fixed costs into variable costs.
EXERCISE 4-18. Constraints [LO 6] Dvorak Music produces two durable music stands:
Stand A Stand B
Selling price $90 $80
Less variable costs 30 44
Contribution margin $60 $36
Stand A requires 6 labor hours and stand B requires 3 labor hours. The company has only 350 available labor hours per week. Further, the company can sell all it can produce of either product.
Required
a. Which stand(s) should the company produce?
b. What would be the incremental benefit of obtaining 15 additional labor hours?
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