Problem:
(MS; DOL; PV graph) You are considering buying one of two local firms (Olson Corp. and Miami Inc.). Olson Corp. uses a substantial amount of direct labor in its manufacturing operations and its salespeople work on com-mission. Miami Inc. uses the latest automated technology in manufacturing; its sales people are salaried. The following financial information is available for the two companies:
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OLSON CORP.
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MIAMI INC.
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2010
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2011
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2010
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2011
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Sales
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$600,000
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$960,000
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$600,000
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$840,000
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Expenses including taxes
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(528,000)
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(823,200)
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(528,000)
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(667,200)
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Net income
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$ 72,000
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$136,800
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$ 72,000
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$172,800
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After examining cost data, you find that the fixed cost for Olson Corp. is $60,000; the fixed cost for Miami Inc. is $300,000. The tax rate for both companies is 40 percent.
a. Recast the income statements into a variable costing format.
b. What are the break-even sales for each firm for each year?
c. Assume that you could acquire either firm for $1,200,000, and you want an after-tax return of 12 percent on your investment. Determine what sales level for each firm would allow you to reach your goal.
d. What is the margin of safety for each firm for each year? What is the degree of operating leverage?
e. Assume that product demand for 2012 is expected to rise by 15 percent from the 2011 level. What will be the expected net income for each firm?
f. Assume that product demand for 2012 is expected to fall by 20 percent from the 2011 level. What will be the expected net income for each firm?
g. Prepare a profit-volume graph for each firm.