Question

Oslo Company prepared the following contribution format income statement based on a sales volume of 1,000 units (the relevant range of production is 500 units to 1,500 units):

  

Sales	$	23,900
Variable expenses		13,300
Contribution margin		10,600
Fixed expenses		7,632
Net operating income	$	2,968

   

Required:

What is the degree of operating leverage

Oslo Company prepared the following contribution format income statement based on a sales volume of 1,000 units (the relevant range of production is 500 units to 1,500 units):

  

Sales	$	24,500
Variable expenses		13,500
Contribution margin		11,000
Fixed expenses		7,700
Net operating income	$	3,300

1. If sales increase to 1,001 units, what would be the increase in net operating income?

2. If the selling price increases by $2.50 per unit and the sales volume decreases by 100 units, what would be the net operating income?

Answer 1

1
Contribution margin	10600
Divide by Net operating income	2968
Degree of operating leverage	3.57

1
Contribution margin per unit	11	=11000/1000
Increase in net operating income	11
2
Revised selling price	27	=24.50+2.50
Revised sales units	900	=1000-100
Sales	24300	=900*27
Variable expenses	12150	=900*13.50
Contribution margin	12150
Fixed expenses	7700
Net operating income	4450