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	$	50,000
Variable expenses		27,500
Contribution margin		22,500
Fixed expenses		14,850
Net operating income	$	7,650

Required:

11. What is the margin of safety in dollars? What is the 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.)

Answer 1

11.Margin of safety= Actual sales- Breakeven sales

Breakeven sales= Fixed Expenses/ Contribution margin ratio

=14850/45%=$33000

Margin of safety sales=$50000-$33000=$17000

Margin of safety percentage=$17000*100/$50000=34%

12. Degree of operating leverage=contribution/ net operating income

=$22500/$7650=2.94

13. If sales increase by 5% , contribution margin will remain same and fixed expenses shall remain same

So,

Sales=$52500

Variable Exp=$28875

Contribution=$23625

Fixed exp=$14850

Net income=$8775

Increase=$8775-$7650=$1125

Percentage=$1125/$7650*100=14.71%

Thus it can be clearly seen by increasing sales by 5% there is increase in income by 14.71%

This is because of leverage effect

Effect of increase of 5%= 5*2.94=14.71%

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