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

$

22,700    

  Variable expenses

12,900    

  Contribution margin

9,800    

  Fixed expenses

8,232    

  Net operating income

$

1,568    

13.	Using the degree of operating leverage, what is the estimated percent increase in net operating income of a 5% increase in sales? Do not round intermediate calculations. Round your percentage answer to 2 decimal places (i.e .1234 should be entered as 12.34).

  

14.

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 $8,232 and the total fixed expenses are $12,900. 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.)

15.

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 $8,232 and the total fixed expenses are $12,900. Given this scenario, and assuming that total sales remain the same, calculate the degree of operating leverage. Using the calculated degree of operating leverage, what is the estimated percent increase in net operating income of a 5% increase in sales? Do not round intermediate calculations. Round your percentage answer to 2 decimal places (i.e .1234 should be entered as 12.34).

Answer 1

SOLUTION

13. Degree of operating leverage = Contribution margin / Net operating income

= ($22,700 - $12,900) / $1,568

= $9,800 /  $1,568 = 6.25

Percentage increase in net operating income = Degree of operating leverage * Percent increase in sales

= 6.25 * 5% = 31.25%

14. Degree of operating leverage = Contribution margin / Net operating income

= ($22,700 - $8,232) / $1,568

= $14,468 / $1,568 = 9.23

Net operating income = Contribution margin - Fixed expenses

= $14,468 - $12,900 = $1,568

15. Percentage increase in net operating income = Degree of operating leverage * Percent increase in sales

= 9.23 * 5% = 46.15%