What is the significance of different dols in this example

Reference no: EM131175999

You are an economist for the Vanda-Laye Corporation, which produces and distributes outdoor cooking supplies. The company has come under new ownership and management and will be undergoing changes in its product lines and operating structure. As an economist, your responsibilities include examining the market factors that affect success or failure of a product, including the supply and demand for the product, market conditions, and the behavior of competitors with similar products.

The new owners are evaluating the operating structure, and you have two possible alternatives. One alternative requires a high level of investment in fixed costs compared to the other alternative. Jorge, your supervisor, has assigned you the task of evaluating the two alternatives.

Assume that the company has no debt. Regardless of the alternative selected, market conditions will require the selling price of the product to be $3.45 per unit. The details for each alternative are given in the table.

	Alternative 1	Alternative 2
Variable costs	$2.20	$2.70
Fixed costs	$80,000	$30,000
Total assets	$350,000	$350,000

Jorge has asked you to provide detailed responses to the following questions:

How does CVP analysis help management in the planning stage of a new business? How does CVP analysis assist the decision makers of an existing business?
What is the break-even quantity for each of the investment alternatives, calculated using an algebraic approach? Complete the tables for each alternative using the Microsoft Excel Template given below and indicate the break-even points. Using Microsoft Excel, graph the relevant data, showing the break-even points and the profit levels for each alternative. Explain the differences between the two alternatives.
What is the degree of operating leverage (DOL) for each alternative at 90,000 units?
What is the significance of different DOLs using this example?
What does the return on equity (ROE) ratio tell management? How is it used in the decision-making process?
What is the ROE under each alternative at an output level of 124,000 for Alternative 1 and 60,000 for Alternative 2? (As the company has no debt, the formula for ROE becomes profit/assets. Use this formula.) Explain the reason for and significance of your answers.
Which alternative would you recommend to the company? Explain the pros and cons of each alternative and the reasons for your selection.

Reference no: EM131175999

Questions Cloud

How the matching principle relates to accrual accounting : The matching principle matches all revenues with the expenses generated to earn those revenues during the accounting period. Explain how the matching principle relates to accrual accounting.

What are the profit-maximizing price and output levels : What are the profit-maximizing price and output levels? Explain them and calculate algebraically for equilibrium P (price) and Q (output). Then, plot the MC, D, and MR curves graphically and illustrate the equilibrium point.

Explain how the substitution effect influences food purchase : Explain how the income effect influences food purchases and provide some examples of the income effect that might occur when the price of food rises and other things remain the same.

What is value of government securities the fed must purchase : Using a required reserve ratio of 10% and assuming that banks keep no excess reserves, what is the value of government securities the Fed must purchase if it wants to increase the money supply by $2 million?

What is the significance of different dols in this example : How does CVP analysis help management in the planning stage of a new business? How does CVP analysis assist the decision makers of an existing business?

How proposed action connects to the study data analysis : Describe the data collection techniques and whether the researcher used appropriate data collection techniques to answer the study's research questions (e.g., qualitative and/or quantitative). Include support from the literature in your descriptio..

Implementing these policies to stabilize the business cycle : what is the Federal Reserve Bank is trying to accomplish by implementing these policies to stabilize the business cycle

Business process re engineering in the 1990s : How does the article suggest that business thinking and practice has evolved since the exhortations for business process re-engineering.

How time orientation affects marketing of sporting events : What communication messages about Australia as a tourist destination are most likely to appeal to middle class consumers from Canada?

User Account

All Pages