Question

Degree of Operating Leverage

Head-First Company plans to sell 5,000 bicycle helmets at $75 each in the coming year. Unit variable cost is $55 (includes direct materials, direct labor, variable factory overhead, and variable selling expense). Total fixed cost equals $49,500 (includes fixed factory overhead and fixed selling and administrative expense). Operating income at 5,000 units sold is $50,500.

Required:

1. Calculate the degree of operating leverage. (Round your answer to the nearest tenth.)

Impact of Increased Sales on Operating Income Using the Degree of Operating Leverage

Head-First Company had planned to sell 5,000 bicycle helmets at $72 each in the coming year. Unit variable cost is $41 (includes direct materials, direct labor, variable factory overhead, and variable selling expense). Total fixed cost equals $49,500 (includes fixed factory overhead and fixed selling and administrative expense). Operating income at 5,000 units sold is $105,500. The degree of operating leverage is 1.5. Now Head-First expects to increase sales by 10% next year.

Required:

1. Calculate the percent change in operating income expected.
%

2. Calculate the operating income expected next year using the percent change in operating income calculated in Requirement 1.

Answer 1