Question

Warrix Corporation has provided the following contribution format income statement. Assume that the following information is within the relevant range.

Sales (3,000 units)	$	150,000
Variable expenses		90,000
Contribution margin		60,000
Fixed expenses		55,000
Net operating income	$	5,000
Answer the follow questions.

1. If sales increase to 3,100 units, net operating income would be closest to:
2. If sales increase to 3,100 units, the breakeven point in units would (increase, decrease or stay the same)
3. If sales increase to 3,100 units, the degree of operating leverage would (increase, decrease or stay the same)

Enter you answers in the same order as above.

Answer 1

Number of units sold = 3,000

Total sales = $150,000

Selling price per unit = Total sales/Number of units sold

= 150,000/3,000

= $50

Total variable expense = $90,000

variable expense per unit = Total variable expense/Number of units sold

= 90,000/3,000

= $30

Fixed expense = $55,000

Income statement

Sales (3,100 x 50)	155,000
variable expense (3,100 x 30)	-93,000
Contribution margin	62,000
Fixed expenses	-55,000
Net operating income	$7,000

At 3,100 units sold, Net operating income will be = $7,000

If sales increase to 3,100 units, Break even point in units will stay the same .

Degree of operating leverage at 3,000 units sold = Contribution margin/Net operating income

= 60,000/5,000

= 12

Degree of operating leverage at 3,100 units sold = Contribution margin/Net operating income

= 62,000/7,000

= 8.86

If sales increase to 3,100 units, Degree of operating leverage will decrease.