Question

Sandy

sells authentic Amish quilts on her website. Suppose

Sandy

expects to sell

3,000

quilts during the coming year. Her average sales price per quilt is

$275​,

and her average cost per quilt is

$150.

Her fixed expenses total

$225,000.

Compute

Sandy​'s

operating leverage factor at an expected sales level of

3,000

quilts. If sales volume increases

10​%,

by what percentage will her operating income​ change? Prove your answer by calculating operating income at a sales volume of

3,000

and at a sales volume of

3,300.

Compute her operating leverage factor. ​(Round your answer to two decimal​ places.)

​First, identify the​ formula, then compute the operating leverage factor.

/

=

Operating leverage factor

Answer 1

Answer no.1

Operating leverage factor = contribution margin/ net operating income

Contribution margin =( selling price p.u. - variable cost p.u.) quantity

Net operating profit= sale value - variable cost - fixed cost

Contribution margin= (275-150)*3000

=$375,000

Net operating income = 825,000-450,000-225,000

=$150,000

Operating leverage factor = 375000/150000

=2.5 Ans

Answer no.2

Change in net operating profit due to 10℅ increase in sale units I.e.300 units

= $37,500

Particulars. 3000 units 3300 units

Sale value. 825,000. 907,500

Variable cost. 450,000. 495,000

Fixed cost. 225,000. 225,000

Operating profit 150,000. 187,500

Change in profit is $ 37,500 Ans

Revised operating leverage factor = 412,500/187,500

=2.2 Ans