24 Jul HOW MUCH DID PROFITS INCREASE BY RELATIVE TO AN INCREASE IN SALES FOR BOTH SCENARIOS?
You own and manage a pretzel and lemonade concession cart. You decide that you want to s Show more The Problem You own and manage a pretzel and lemonade concession cart. You decide that you want to sell your products at a NASCAR race weekend in Loudon NH. The racetrack owners let you choose one of the following rental options: Low Overhead Rent Commission of 30% of total sales High Overhead Rent $1000 fixed rental cost for the entire weekend Your food and beverage costs are 20% of total sales. You also have to pay an employee $400 to run the cart over the weekend. Question 1 Find Breakeven For each scenario calculate at what level of sales where you will reach the breakeven point. Question 2 Calculate Degree of Operating Leverage You estimate that your sales for the weekend will either be average or great: Average: $2800 in sales Great: 50% higher than average or $4200 What is your degree of leverage at AVERAGE sales of $2800 for both the low and high overhead scenario? Operating Leverage = Sales Total Variable Cost Sales Total Cost (Fixed and Variable) Question 3 Calculate Profits and Increase In Profitability Calculate the profit potential for an average and great weekend for both the low overhead scenario and the high overhead scenario. How much did profits increase by relative to an increase in sales for both scenarios? How does this compare with the answers you derived in question 2? Conclusion Companies with a higher fixed overhead (and hence lower variable costs relative to fixed costs) must reach a higher level of sales prior to becoming profitable. However they will enjoy a greater increase in profits as sales increase. High Operating Leverage Low Operating Leverage Breakeven Higher Lower Increase In Profits Faster Slower Show less
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