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 $ 24,200 Variable expenses 13,400 Contribution margin 10,800 Fixed expenses 7,668 Net operating income $ 3,132 1. What is the margin of safety in dollars? (Do not round intermediate calculations.) 2. What is the margin of safety percentage? (Round your final answers to the nearest whole percentage (i.e, .12 should be entered as 12).) 3. What is the degree of operating leverage? (Round your answer to 2 decimal places.) 4. Using the degree of operating leverage, what is the estimated percent increase in net operating income of a 3% 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). 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 $7,668 and the total fixed expenses are $13,400. 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 3% 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

1	Margin of Safety -- Dollars	$7,019
2	Margin of Safety -- %	29%
3	Degree of operating leverage	3.45
4	Estimated Recent increase in net operating inocme for 3% increase in sales	10.35

Working:

Sales	24200	100.00%
Variable expenses	13400	55.37%
Contribution Margin	10800	44.63%
Fixed Expenses	7668	31.69%
Net operating Income	3132	12.94%
Break-even sales	Fixed Expenses / Contribution margin %
	7668 / 44.63% = 17,181
Margin of safety -Dollars	Actual Sales - Break-even Sales
	=24,200 - 17.181 = 7,019
Margin of safety - %	=7,019 / 24,200 = 29%
Degree of operating leverage = Contribution margin / Net operating income
	= 10,800 / 3,132 = 3.45

5.

Degree of operating leverage = Contribution margin / Net operating income
	= 16,532/ 3,132 = 5.28

Working:

Sales	24200	100.00%
Variable expenses	7668	31.69%
Contribution Margin	16532	68.31%
Fixed Expenses	13400	55.37%
Net operating Income	3132	12.94%