Unit 1: Cost-Volume-Profit Analysis Economics Worksheet With Answers - Cma311s Notes, 2010 Page 18

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Example 9
The following details regarding two different firms are available:
Company A
Company B
N$
%
N$
%
Sales
60 000
100
60 000
100
– Variable cost
15 000
25
30 000
50
= Contribution
45 000
75
30 000
50
– Fixed cost
30 000
15 000
= Net profit
15 000
15 000
Required:
9.1
Calculate the increase in profit for each company if sales were to increase by 20%.
9.2
Calculate the decrease in profit for each company if sales were to decrease by 20%.
Solution to Example 9
Company A
Company B
Details
Presently
20% increase
Presently
20% increase
N$
N$
N$
N$
Sales
60 000
72 000
60 000
72 000
– Variable cost
15 000
18 000
30 000
36 000
= Contribution
45 000
54 000
30 000
36 000
– Fixed cost
30 000
30 000
15 000
15 000
= Net profit
15 000
24 000
15 000
21 000
% increase in Profit
60%
40%
Conclusion: Company A has relatively high fixed costs. However, because it has a high P/V-ratio, profit
will also increase at a higher rate than that of Company B.
Company A
Company B
Details
Presently
20% decrease
Presently
20% decrease
N$
N$
N$
N$
Sales
60 000
48 000
60 000
48 000
– Variable cost
15 000
12 000
30 000
24 000
= Contribution
45 000
36 000
30 000
24 000
– Fixed cost
30 000
30 000
15 000
15 000
= Net profit
15 000
6 000
15 000
9 000
% decrease in Profit
60%
40%
Conclusion:
Company A has relatively high fixed costs. Therefore, because it has a high P/V-ratio, profit will also
decrease at a higher rate than that of Company B.
The operating leverage factor reflects how much influence a percentage change in sales volume has on net
profit. A specific operating leverage factor is valid for a specific sales volume and changes as the sales
volume changes. The operating leverage factor is calculated as follows:
Contribution
Operating leverage factor = Net profit
18

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