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	$	25,000
Variable expenses		17,500
Contribution margin		7,500
Fixed expenses		4,200
Net operating income	$	3,300

F. If sales decline to 900 units, what would be the net operating income?

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

H. If the variable cost per unit increases by $1, spending on advertising increases by $1,150, and unit sales increase by 130 units, what would be the net operating income?

I. What is the break-even point in unit sales? I. What is the break-even point in dollar sales?

J. How many units must be sold to achieve a target profit of $4,500?

K. What is the margin of safety in dollars? What is the margin of safety percentage?

L.What is the degree of operating leverage?

M. Using the degree of operating leverage, what is the estimated percent increase in net operating income of a 5% increase in unit sales? (Round your intermediate calculations and final answer to 2 decimal places.)

N.Assume that the amounts of the company’s total variable expenses and total fixed expenses were reversed. In other words, assume that the total variable expenses are $4,200 and the total fixed expenses are $17,500. Under this scenario and assuming that total sales remain the same, what is the degree of operating leverage? (Round your answer to 2 decimal places.)

O.Assume that the amounts of the company’s total variable expenses and total fixed expenses were reversed. In other words, assume that the total variable expenses are $4,200 and the total fixed expenses are $17,500. Using the degree of operating leverage, what is the estimated percent increase in net operating income of a 5% increase in unit sales?

Answer 1

Net Operating Income = 7500*900/1000 – 4200

= $2,550

G.Net Operating Income = Sales – variable costs – fixed costs

= (27-17.5)*900 – 4200

= $4,350

H. Net Operating Income = (25-18.5)*1130 – 4200-1150

= $1,995

I.Break even point in unit sales = Fixed costs/(Selling price per unit – Variable cost per unit)

= 4200/(25-17.5)

= 560 units

in dollar sales = 560*25 = $14,000

J.Units required to be sold = (Target profit + Fixed costs)/Contribution margin per unit

= (4500+4200)/7.5

= 1160 units

K.Margin of safety in dollars = Sales – Break even sales

= 25000-14000

= $11000

MOS % = 11000/25000

= 44%

L.DOL = Contribution Margin/Net Operating Income

= 7500/3300

=2.27 times

M.% increase in net operating income = % increase in sales*DOL

= 5%*2.27

= 11.35% increase

N. DOL = (25000-4200)/3300

= 6.30 times

O. % increase in net operating income = 5%*6.30

= 31.5%