Question 2.  Part A

Jack makes electric golf carts, sold for $4,000 each. Relevant cost data are as follows:

Direct materials (per unit) $1,600                 Fixed manufacturing overhead (total) $200,000

Direct labor (per unit) 500                                         Fixed selling expenses (total) 80,420

Variable manufacturing overhead 250

Variable selling costs (per unit) 25

Jack pays income taxes at the rate of 35 percent.

(1) Number of carts that need to be sold to earn $500,000 after tax    ___________ carts

(2) Revenue required to yield after tax income of 20% of revenue?  $ ____________

1. Compute the number of carts that need to be sold to earn $500,000 after tax.

2. Determine the revenue at which after tax profit equals 20% of sales.

Question 2  Part B

Howe’s wholesalers sells baseball bats and gloves. Historical data show that it sells six bats for every two gloves. Relevant cost and price data are as follows:

Contribution margin per bat $4.00 Selling price per bat $10.00

Contribution margin per glove $5.00 Selling price per glove $15.00

Fixed costs connected with these products amount to $170,000 per year. Ignore taxes.

(a) Number of bats that need to be sold to earn $127,500     ___________ bats

(b) Profit earned with changed sales mix   $ ____________

(a) Determine the number of bats that must be sold to earn $127,500 from these two products.

(b) Suppose Howe realizes $800,000 in revenue. However, it only sold five bats for every two gloves. What is the income earned?

(c) This part is independent of the above two parts. In class, we defined operating leverage in two different ways. Using any one of these definitions, explain intuitively why a manager should care about operating leverage. When would a manager prefer a technology or a cost structure that reflects high vs low operating leverage.