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One of the roles of financial management is to assist businesses to choose low-risk investments...

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Accounting

One of the roles of financial management is to assist businesses to choose low-risk investments
while ensuring higher returns. This idea is the foundation and held as a way to maintain and
maximise the shareholders wealth or bondholders profits. The following is an extract of
information from two companies: Cynored Pty Ltd and CB Electricity Pty Ltd respectively.
Cynored Pty Ltd CB Electricity Pty Ltd
Electricity Units Produced and Sold 25,00025,000
Amount ($) Amount ($)
Revenues 112500000112500000
Total Costs 7500000075000000
Variable Costs 2500000050000000
Fixed Costs 5000000025000000
Net Operating Income 3750000037500000
Required:
i. You are required to find the break-even point for each company in Units (6 marks)
ii. Calculate the degree of operating leverage for each company at 25,000 units (8 marks)
iii. Comment on the differences that you observe between these companies break-even
points and degree of operating leverage (6 marks)
iv. Based on the information on this question, how can the managements of Cynored Pty Ltd
and CB Electricity Pty Ltd use marginal costing in improving the fortunes of their
companies? (5 marks)

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