C-12.26 Understanding the Effects of Operations Leverage. This provides an illustration of CVP analysis
Understanding the effects of operating leverage. HighTech, Inc., and
OldTime Co. compete within the same industry and had the following
operating results in 2010:

HighTech, Inc. OldTime Co.
Sales $2,100,000 $2,100,000
Variable expenses $420,000 $1,260,000
Contribution margin $1,680,000 $840,000
Fixed expenses $1,470,000 $630,000
Operating income $210,000 $210,000

REQUIRED:

a. Calculate the break-even point for each firm in terms of revenue,
b. What observations can you draw by examining the break-even point of
each firm given that they earned an equal amount of operating income on
identical sales volumes in 2010?
c. Calculate the amount of operating income (or loss) that you would expect each firm to report in 2011 if sales were to
1. Increase by 20%.
2. Decrease by 205
d. Using the amount computed in requirement c, calculate the increase or
decrease in the amount of operating income expected in 2011 from the
amount reported in 2010.
e. Explain why an equal percentage increase (or decrease) in sales for
each firm would have such differing effects on operating income.
f. Calculate the ratio of contribution margin to operating income for
each firm in 2010. (Hint: Divide contribution margin by operating
income).
g. Multiply the expected increase in sales of 20% for 2011 by the ration
of contribution margin to operating income for 2010 computed in
requirement f for each firm (Hint: Multiply your answer in requirement f
by 0.2).
h. Multiply your answer in requirement g by the operating income of $210,000 reported in 2010 for each firm.
i. Compare your answer in requirement h with your answer in requirement
d. What conclusions can you draw about the effects of operating leverage
from the steps you performed in requirements f, g, and h?

E-13.10 – Product Costing – Manufacturing Overhead –
Over/Underapplied. This illustrates the issues for allocating
manufacturing overhead.

Manufacturing overhead – over/underapplied. LampArt Co. makes
specialty table lamps. Manufacturing overhead is applied to production
on a direct labor hours basis. During November, the first month of the
company’s fiscal year, $173,250 of manufacturing overhead was applied to
Work in Process Inventory using the predetermined overhead application
rate of $15 per direct labor hour.

REQUIRED:
a. Calculate the number of hours of direct labor used during November.
b. Actual manufacturing overhead costs incurred during November totaled
$166,425. Calculate the amount of over or underapplied overhead for
November.
c. Identify two possible explanations for the over or underapplied overhead.
d. Explain the accounting appropriate for the over or underapplied overhead at the end of November.