The Effect of Investment Strategy and Operating Leverage on Risk and Profits – Following is a set of pro forma (or projected) income statements for a company. The columns labeled A are projected results for the company if it follows Strategy A. The columns labeled B are projected results for the company if it follows Strategy B.
|
Low sales |
Medium sales |
High sales |
||||
|
A |
B |
A |
B |
A |
B |
|
|
Sales |
$3,000 |
$3,000 |
$4,000 |
$4,000 |
$5,000 |
$5,000 |
|
Cost of sales |
180 |
180 |
240 |
240 |
300 |
300 |
|
Depreciation |
315 |
450 |
355 |
450 |
395 |
450 |
|
Wages expense |
1,300 |
1,500 |
1,600 |
1,500 |
1,800 |
1,500 |
|
Other operating expenses |
1,000 |
1,000 |
1,000 |
1,000 |
1,000 |
1,000 |
|
Operating income |
205 |
130 |
805 |
810 |
1,505 |
1,750 |
|
Income tax (expense) or savings |
72 |
46 |
282 |
284 |
527 |
613 |
|
Net income |
$133 |
($84) |
$523 |
$526 |
$978 |
$1,137 |
Required Study the information given and discuss each of the following.
A. The comparative risk of Strategy A versus Strategy B, as shown in the projected net income results
B. The company’s operating leverage
C. The company’s investment strategy