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	$	65,000
Variable expenses		45,500
Contribution margin		19,500
Fixed expenses		14,040
Net operating income	$	5,460

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

2. What is the degree of operating leverage? (Round your answer to 2 decimal places.)

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

4. 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 $14,040 and the total fixed expenses are $45,500. 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.)

5. 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 $14,040 and the total fixed expenses are $45,500. Given this scenario and assuming that total sales remain the same. Using the degree of calculated operating leverage, what is the estimated percent increase in net operating income of a 5% increase in sales? (Round your intermediate calculations and final answer to 2 decimal places.)

Answer 1

1) Break even sales = 14040/.30 = 46800

Margin of safety sales = (65000-46800) = 18200

Margin of safety % = 18200/65000 = 28%

2) Degree of operating leverage = 19500/5460 = 3.57 Times

3) If sales increase by 5% then net operating income increase by (3.57*5) = 17.85%

4) Contribution margin income statement

Sales	65000
Variable cost	14040
Contribution margin	50960
Fixed cost	45500
Net operating income	5460

Degree of operating leverage = 50960/5460 = 9.33 Times

5) If sales increase by 5% then net operating income increase by (9.33*5) = 46.65%