Assume that two companies, Brake, Inc. and Carbo, Inc., have the following operating results: Brake, Inc. Carbo, Inc. Sales $300,000 $300,000 Variable Costs 60,000 180,000 Fixed Costs 210,000 90,000 Operating Income $30,000 $30,000 Required: 1. Calcu

  

Assume that two companies, Brake, Inc. and Carbo, Inc., have the following operating results:

   

Brake, Inc.

Carbo, Inc.

 

Sales

$300,000 

$300,000 

 

Variable Costs

60,000

180,000

 

Fixed Costs

210,000

90,000

 

Operating Income

$30,000

$30,000

Required:

1. Calculate the contribution margins for the two      companies. 

Contribution margin = (Revenues – Variable expenses) / Revenues

Brake, Inc: ($300,000 - $60,000) / $300,000 = $240,000 / $300,000 = 80%

Carbo, Inc.: ($300,000 - $180,000) / $300,000 = 40%

1. Calculate the break-even point for each firm, in      dollars and in units. 

Break-even point per unit = Fixed expenses / (Price - Variable expenses)

Brake, Inc.: 

Carbo, Inc.: 

1. Compare the two companies. What conclusions could you      make regarding the use of operating leverage employed by the two firms? 
2. Assume that both companies experience an increase in      sales by 15% next year.  What would be the operating income for each      firm net year? Explain the difference in the change in operating income      between the two companies. 
3. Based on the information from the above questions, what      recommendations would you make to the two companies and why?