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	$	15,000
Variable expenses		9,000
Contribution margin		6,000
Fixed expenses		3,120
Net operating income	$	2,880
11. What is the margin of safety in dollars? What is the margin of safety percentage? margin of safety in dollars____ margin of safety percentage____ 12. What is the degree of operating leverage? (Round your answer to 2 decimal places.) 13. 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.) 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 $3,120 and the total fixed expenses are $9,000. 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 $3,120 and the total fixed expenses are $9,000. 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

11) Margin of safety = Actual sales - break even sales

Break even sales = fixed costs / contribution margin ratio

= 3120 / (6000/9000)

= $4,815

Margin of safety = 15000 - 4815

= $10,185

Margin of safety in Percentage = 10185 / 15000

= 67.9%

12) Degree of operating leverage = contribution margin / operating income

= 6000 / 2880

= 2.08

13) Degree of operating levergae = change in operating income / change in sales

2.08 = change in operating income / 5%

change in operating income = 10.41% increase

14) Degree of operating levergae under reverse scenario = (15000 - 3120) / (15000-3120 - 9000)

= 4.13

15) Percent increase in operating leverage = DOL * increase in sales

= 4.13*5%

= 20.63%