Chapter 20: Q20RQ (page 1119)
What is sensitivity analysis? How do managers use this tool?
Answer
A sensitivity analysis is a “what if” technique.
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Use the following information to complete Short Exercises S20-10 through S20-15.
Funday Park competes with Cool World by providing a variety of rides. Funday Park sells tickets at \(70 per person as a one-day entrance fee. Variable costs are \)42 per person, and fixed costs are $170,800 per month.
S20-15 Computing degree of operating leverage
Refer to the original information (ignoring the changes considered in Short Exercises S20-12 and S20-13). If Funday Park expects to sell 8,100 tickets, compute the degree of operating leverage (round to two decimal places). Estimate the operating income if sales increase by 15%.
Question: Steve and Linda Hom live in Bartlesville, Oklahoma. Two years ago, they visited Thailand. Linda, a professional chef, was impressed with the cooking methods and the spices used in Thai food. Bartlesville does not have a Thai restaurant, and the Homs are contemplating opening one. Linda would supervise the cooking, and Steve would leave his current job to be the maître d’. The restaurant would serve dinner Tuesday through Saturday. Steve has noticed a restaurant for lease. The restaurant has seven tables, each of which can seat four. Tables can be moved together for a large party. Linda is planning on using each table twice each evening, and the restaurant will be open 50 weeks per year. The Homs have drawn up the following estimates:
Average revenue, including beverages and desserts \( 45 per meal Average cost of food 15 per meal Chef’s and dishwasher’s salaries 5,100 per month Rent (premises, equipment) 4,000 per month Cleaning (linen, premises) 800 per month Replacement of dishes, cutlery, glasses 300 per month Utilities, advertising, telephone 2,300 per month
Requirements
1. Compute the annual breakeven number of meals and sales revenue for the restaurant.
2. Compute the number of meals and the amount of sales revenue needed to earn operating income of \)75,600 for the year.
3. How many meals must the Homs serve each night to earn their target profit of $75,600?
4. What factors should the Homs consider before they make their decision as to whether to open the restaurant?
White Company sells flags with team logos. White has fixed costs of \(639,600 per year plus variable costs of \)4.20 per flag. Each flag sells for \(12.00.
Requirements
1. Use the equation approach to compute the number of flags White must sell each year to break even.
2. Use the contribution margin ratio approach to compute the dollar sales White needs to earn \)32,500 in operating income for 2018. (Round the contribution margin to two decimal places.)
3. Prepare White’s contribution margin income statement for the year ended December 31, 2018, for sales of 73,000 flags. (Round your final answers up to the next whole number.)
4. The company is considering an expansion that will increase fixed costs by 23% and variable costs by $0.60 per flag. Compute the new breakeven point in units and in dollars. Should White undertake the expansion? Give your reasoning. (Round your final answers up to the next whole number.)
Use the following information to complete Short Exercises S20-16 and S20-17.
Wild Waters Swim Park sells individual and family tickets. With a ticket, each person receives a meal, three beverages, and unlimited use of the swimming pools. Wild Waters has the following ticket prices and variable costs for 2018:
Individual Family Sales price per ticket \( 50 \) 150 Variable cost per ticket 35 140
Wild Waters expects to sell one individual ticket for every four family tickets. Wild Waters’s total fixed costs are $27,500.
S20-17 Calculating breakeven point for two products
For 2019, Wild Waters expects a sales mix of four individual tickets for every one family ticket.
Requirements
1. Compute the new weighted-average contribution margin per ticket.
2. Calculate the total number of tickets Wild Waters must sell to break even.
3. Calculate the number of individual tickets and the number of family tickets the company must sell to break even.
Calculating breakeven point in units, contribution margin given Mackler, Inc. sells a product with a contribution margin of \(50 per unit. Fixed costs are \)8000 per month. How many units must Mackler sell to break even?
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