Question

3-15 Operating leverage (LO 4) Hogue Sports Hut provides individual instruction and coaching to children participating in the city's baseball, softball, basketball, and soccer youth leagues. Last year's results were as follows:

Sales revenue	$950,000
Variable expenses	646,000
Contribution margin	304,000
Fixed expenses	182,400
Operating income	$ 121,600

Required

a.What is Hogue Sports Hut's degree of operating leverage?

b.If Anna Hogue, the company's president, is successful in increasing sales revenue by 8%, by what percent will the company's operating income increase?

c.After achieving the sales increase in part (b), what will be the company's new operating income?

d.After achieving the sales increase in part (b), what will be the company's new operating leverage?

Answer 1

-- All working forms part of the answer

A	Contribution margin	$304,000
B	Operating Income	$121,600
C = A/B	Degree of Operating leverage	2.5	Answer [a]
D	Increase in Sales revenue	8%
E = C x D	% increase in Operating Income	20%	Answer [b]
F = B + (B x E)	New Operating Income	$145,920
G = B + (B x D)	New contribution margin	$328,320	Answer [c]
H = G/F	New Degree of Operating Leverage	2.25	Answer [d]