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SUMMATIVE ASSESSMENT (ASSIGNMENT) – 2020 FIRST SEMESTERFMA101FINANCIAL MANAGEMENT IQuestion 6 [24]Hardware House (Pty) Ltd is a retailer of a wide range of hardware products. It has branchesthroughout the country and its strategy is to increase its sales revenue by opening more stores.The company rents the premises of all its stores. The executive management, however, isconcerned that its strategy could be very harmful to operating profits should there be adownturn in the economy, such as a recession.One of the financial tools management wants to use to assess the vulnerability of its profits isto determine the operating leverage of the business.At the last executive management meeting, the following information was tabled, discussedand approved to be used to determine operating leverage:20192020 projectedActualincrease (decrease)RevenueR25 670 000R30 804 000Cost of goods sold17 110 00020 874 200Operating expenses3 523 0003 748 460Selling expenses1 080 0001 004 400General and administrative expenses1 870 0001 944 800Property rent expense350 000549 500Depreciation223 0001249 760Required:6.1.Complete the information in the table for 2019 and 2020, and then use the informationin the table to calculate Hardware House’s degree of operating leverage (DOL) andexplain its effect on operating profit.18)6.2.Should the company be concerned about the possible negative effect that its strategycan have on profits in poor economic conditions? Give reasons for your answer.


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