Question

The degree of operating leverage for Madrigal Company is 2. The actual operating income is $14,000....

The degree of operating leverage for Madrigal Company is 2. The actual operating income is $14,000. If the company expects a 25% increase in sales, operating income should increase by $3,500.

True or False?

Business   Accounting   
0 0
Add a commentTranscribed image text
Next >

Homework Answers

Answer #1

The Answer is False. See the explaination stepwise below.

Step1. The DOL of 2 times Mardrigal Company indicates that each percentage of increase in sales revenues is expectedd to generate 2 percent increase increase in profit or operaring income.

Step2. The DOL is used to forcast the effect of specified increase in sales on operating income

Step3. The effect of increase in sales on operating income is calculated as below.

Percentage increase in Operating Income = DOL Sales increase in terms of percentage

= 2 25% = 50%

Step4. Now Compute Dollar change in Operating Income as follows.

Dollar Change in Operating Income = % increase in Operating income Operating Income

= 50% $14,000 = $7000

Thus, Operating Income increases by $7,000 as a result of 25% increase in sales revenues. Answer $3,500 is False.

Estimated new operating Income would be $ 21,000(14,000+7000).

0 0
Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Log In

Sign Up

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
If a company has a degree of operating leverage equal to 1.129 then a 5% increase...
If a company has a degree of operating leverage equal to 1.129 then a 5% increase in sales will result in a 22.58% increase in operating income. True/False
12. Phillips Company expects to have a degree of operating leverage in 2020 of 3.5 based...
12. Phillips Company expects to have a degree of operating leverage in 2020 of 3.5 based on expected sales revenue of $1,200,000 and expected operating income of $200,000. If sales fall by 10%, Stevens can expect: a. a decrease in operating income of $75,000 b. a decrease in operating income of $175,000 c. an increase in operating income of $70,000 d. a decrease in operating income of $70,000 10.    Which of the following statements is not true? a. Operating...
Exercise 6-9 Compute and Use the Degree of Operating Leverage [LO6-8] Engberg Company installs lawn sod...
Exercise 6-9 Compute and Use the Degree of Operating Leverage [LO6-8] Engberg Company installs lawn sod in home yards. The company’s most recent monthly contribution format income statement follows: Amount Percent of Sales Sales $ 143,000 100 % Variable expenses 57,200 40 % Contribution margin 85,800 60 % Fixed expenses 18,000 Net operating income $ 67,800 Required: 1. What is the company’s degree of operating leverage? 2. Using the degree of operating leverage, estimate the impact on net operating income...
Degree of operating leverage: 3 Break-even revenue:220,000 Variable Expense: 45% of Sales What is the actual...
Degree of operating leverage: 3 Break-even revenue:220,000 Variable Expense: 45% of Sales What is the actual net operating income?
Degree of Operating Leverage Head-First Company plans to sell 5,000 bicycle helmets at $75 each in...
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...
The degree of operating leverage of company A is higher than company B. If sales decrease...
The degree of operating leverage of company A is higher than company B. If sales decrease by 10% for each company, then which company would have higher net operating income and why?
The Kandy Shop has an operating income of $29,000. a) Calculate the degree of operating leverage...
The Kandy Shop has an operating income of $29,000. a) Calculate the degree of operating leverage for each of the independent cases (assuming operating income is held constant): i. Contribution Margin is $58,000. ii. CM ratio is 56% and revenue is $133,000. iii. Selling price per unit is $34, variable costs per unit are $16 and it sold 3,200 units. Do not enter dollar signs or commas in the input boxes. Round contribution margin and operating income to the nearest...
Homecare Corporation's degree of operating leverage 3. sales increase by 10% , by about how much...
Homecare Corporation's degree of operating leverage 3. sales increase by 10% , by about how much would the company's net operating income increase?
Problem 5-23 CVP Applications; Contribution Margin Ratio: Degree of Operating Leverage [LO5-1, LO5-3, LO5-4, LO5-5, LO5-8]...
Problem 5-23 CVP Applications; Contribution Margin Ratio: Degree of Operating Leverage [LO5-1, LO5-3, LO5-4, LO5-5, LO5-8] Feather Friends, Inc., distributes a high-quality wooden birdhouse that sells for $40 per unit. Variable expenses are $20.00 per unit, and fixed expenses total $160,000 per year. Its operating results for last year were as follows: Sales $ 1,120,000 Variable expenses 560,000 Contribution margin 560,000 Fixed expenses 160,000 Net operating income $ 400,000 Required: Answer each question independently based on the original data: 1....
What is operating leverage? How can the degree of operating leverage be used in analyzing change...
What is operating leverage? How can the degree of operating leverage be used in analyzing change in sales?
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT