26 Jul HOW DOES THE FORE CASTED VOLATILITY OF FUTURE YEARS SALES IMPACT UP SCALES DECISION?
Upscale Hides sells its only product a leather coat for $3000 each. The production process is high Show more Upscale Hides sells its only product a leather coat for $3000 each. The production process is highly labor intensive with almost the entire coat being hand cut and stitched by a single craftsmen. Currently the companys very skilled craftsmen are paid on a finished coat basis. Current variable costs (including labor) per coat are $1200 and total fixed operating costs for the company are $4000000. Fixed interest charges are $500000. Upscale is contemplating a change in how it pays its craftsmen. If they are each paid a guaranteed fixed annual salary total fixed operating costs will rise to $6400000 but variable costs per coat will drop to only $400 a coat. {a} Compute the degree of operating leverage at a sales level of $9000000 under both the present pay system and the proposed new one. {b} Explain why there is a difference between your two values in {a}. {c} How does the fore casted volatility of future years sales impact Up scales decision? Show less
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