Problem 1: Operating Leverage
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 John'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.
Problem 2. Constraints
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 to do:
a. Which stand(s) should the company produce?
b. What would be the incremental benefit of obtaining 15 additional labor hours?