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	$	105,000
Variable expenses		73,500
Contribution margin		31,500
Fixed expenses		27,720
Net operating income	$	3,780

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 $27,720 and the total fixed expenses are $73,500. 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

The degree of operating leverage can be calculated by subtracting the variable costs of sales from Sales and dividing that number by ( sales minus variable costs and fixed costs).

i.e., (Sales - VC) / (Sales - VC - FC)

Particulars	Case 1	Case 2
Sales	105,000	105,000
Variable Cost (VC)	73,500	27,720
Contribution margin	31,500	77,280
Fixed Cost (FC)	27,720	73,500
Net operating income	3,780	3,780
Sales - VC            (A)	31,500	77,280
Sales - VC - FC    (B)	3,780	3,780
Degree of Operating Leverage (C = A / B)	8.33	20.44
% Increase in Sales (D)	5%	5%
% Increase in Net Operating Income (E = C x D)	41.67%	102.22%