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    An20231002 1430

    Uploaded by

    Jozel Dogelio
    This document contains an analysis of scenarios for Elena's titanium piton business. It examines the sales, contribution margin, net income, and break-even points under different scenarios such as maintaining the status quo, ordering units from a retailer, or purchasing a forge. It also calculates the margin of safety and degree of operating leverage between scenarios. Based on the analysis showing higher potential profits when purchasing the forge, even with a small volume increase, the document recommends that Elena pursue purchasing the forge to take advantage of opportunities for growth.

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    An20231002 1430

    Uploaded by

    Jozel Dogelio
    37 views4 pages
    This document contains an analysis of scenarios for Elena's titanium piton business. It examines the sales, contribution margin, net income, and break-even points under different scenarios such as maintaining the status quo, ordering units from a retailer, or purchasing a forge. It also calculates the margin of safety and degree of operating leverage between scenarios. Based on the analysis showing higher potential profits when purchasing the forge, even with a small volume increase, the document recommends that Elena pursue purchasing the forge to take advantage of opportunities for growth.

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    AN20231002-1430

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    This document contains an analysis of scenarios for Elena's titanium piton business. It examines the sales, contribution margin, net income, and break-even points under different scenarios such as maintaining the status quo, ordering units from a retailer, or purchasing a forge. It also calculates the margin of safety and degree of operating leverage between scenarios. Based on the analysis showing higher potential profits when purchasing the forge, even with a small volume increase, the document recommends that Elena pursue purchasing the forge to take advantage of opportunities for growth.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    37 views4 pages

    An20231002 1430

    Uploaded by

    Jozel Dogelio
    This document contains an analysis of scenarios for Elena's titanium piton business. It examines the sales, contribution margin, net income, and break-even points under different scenarios such as maintaining the status quo, ordering units from a retailer, or purchasing a forge. It also calculates the margin of safety and degree of operating leverage between scenarios. Based on the analysis showing higher potential profits when purchasing the forge, even with a small volume increase, the document recommends that Elena pursue purchasing the forge to take advantage of opportunities for growth.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    of 4

    1

    <Client’s Name>

    <Subject Code>

    <Professor’s Name>

    <Date>

    Bolzano Titanium

    Question 1

    Under the different scenarios, Elena’s operation would result into the following figures:

    Sales Contribution Margin Net Income (Loss)


    Status Quo $360,000.00 $240,000.00 $0.00
    Retailer’s Base Offer
    Units are Ordered $1,200,000.00 $720,000.00 ($240,000.00)
    Forge is Purchased $1,200,000 $720,000.00 $3,600.00
    Retailer’s +10%
    Volume
    Units are Ordered $1,320,000.00 $792,000.00 ($168,000.00)
    Forge is Purchased $1,320,000.00 $792,000.00 $75,600.00

    Question 2

    For this case, the only variable cost is the cost of titanium. This is because it is only the

    cost of titanium that is directly proportional to the pitons made. If no piton is made, no cost of

    titanium is incurred. On the other hand, the rest of the expenses are fixed costs:

    - Forge cost for ordered units

    - Wages, operating costs, administration costs, depreciation expense, and interest expense

    These are fixed cost because even if there were no pitons made, these will always be

    incurred. Though the forge cost for units ordered can be mistakenly classified as variable, it is

    fixed because the forge has a capacity of 1,000 to 1,100 units. Same cost will be incurred even if

    the capacity gets higher.


    2

    Question 3

    The relevant range of the forge is 1,000 to 1,100 units. Within this range, the fixed cost

    will not change (Brigham & Houston, 2019).

    Question 4

    For this case, the direct labor is fixed because based on the agreement, the workers will

    be paid the $60,000 each annually upon purchase of the forge, regardless how much the forge

    has made within the period.

    Question 5

    Based on the three scenarios, under the status quo the break-even point in units is 12,000

    pitons. On the other hand, regardless if the retailer’s demand is 4,000 or 4,400 units, the break-

    even point if units were still ordered are 64,000 units. Lastly, regardless of the retailer’s demand

    but if the forge is purchased, the break-even point is only at 47,760 units.

    Question 6

    The following are the margin of safety for baseline and +10% volume of the retailer’s

    offer.

    Baseline +10%
    Units Ordered ($240,000.00) ($168,000.00)
    Forge is Purchased $3,600.00 $75,600.00

    Question 7

    The degree of operating leverage (DOL) between the scenarios are both high and low.

    Under the retailer’s base offer and the forge is purchased, the DOL is at 200 times. On the other

    hand, if the forge is purchased yet there is a +10% increase in volume, the DOL is only at 10.48.
    3

    Question 8

    Based on the data, Elena should consider doing the pitons business by purchasing the

    forge. Given that the guaranteed demand is only 4,000 per month and the expected net income is

    only $3,600 for the year, a high DOL is an avenue to earn more if she decides to expand. If

    business went well, she may even have more demand from other retailers that may provide a

    higher price. Both of which inures to the benefit of Elena. This is the truth as reflected in the

    other scenario when the demand has increased by mere 10%. Elena will gain an additional profit

    of $72,000.00. Considering this venture is only at its inception, and the prospect of earning is

    already high, the better decision is to take the opportunity.


    4

    Works Cited

    Brigham, E. F., & Houston, J. F. (2019). Fundamentals of Financial Management (15th ed.) [E-

    Book]. Cengage Learning, Inc.

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