On March 1 2004 Seagram Co CEO Edgar Bronfman Jr purchased W

On March 1, 2004, Seagram Co. CEO Edgar Bronfman, Jr., purchased Warner Music Group for $2.6 billion. The next day he fired 1,000 salaried employees and reduced top executives\' salaries, slashing overhead costs by more than $250 million.

Required

(a)  

What effect would these cuts have on Warner\'s breakeven point? Explain.

(b)  

What effect would these cuts have on Warner\'s margin of safety? Explain.

(c)  

What effect would these cuts have on Warner\'s degree of operating leverage? Explain.

Solution

a) Break even point will decrease in $ term and unit term as contribution margin will increase due to reduction in overhead costs.

b) Margin of safety will increase as break even point has reduced.

c) Degree of operating leverage will improve due to reduction in overhead costs. % EBIT increase due to % increase in sale will be higher.