Question

Oslo Company prepared the following contribution format income statement based on a sales volume of 1,000...

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.)

Homework Answers

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%
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