Question

Suppose

Kathy

sells

2,000

posters. Use the following financial data

​($40

sales​ price,

$31

variable​ cost,

$5,220

fixed​ expenses) to compute her operating leverage factor. If sales volume increases

20​%,

by what percent will

Kathy​'s

operating income​ change? Prove your answer.

​First, identify the​ formula, then compute the operating leverage factor. ​(Round your answer to two decimal​ places.)

Contribution margin

/

Operating income

=

Operating leverage factor

/

=

If sales volume increases

20​%,

by what percent will

Kathy​'s

operating income​ change? ​(Round the percentage change to one decimal​ place, X.X%)Operating income will increase by

nothing​%.

Prove your answer. ​(Round the percentage change to one decimal​ place, X.X%)

Original volume (posters)
Add: Increase in volume
New volume (posters)
Multiplied by: Unit contribution margin
New total contribution margin
Less: Fixed expenses
New operating income
Less: Operating income before change in volume
Increase in operating income
Percentage change		%

Choose from any list or enter any number in the input fields and then continue to the next question.

Answer 1

Sol:

Contribution per unit = $40 - $31 = $9.

Sales volume = 2,000

Total Contribution = 2,000 × $9 = $18,000

Less: Fixed expenses =($ 5,220)

Operating income = $12,780

Operating leverage = $18,000/$12,780 = 1.41

If sales volume increase by 20% -

Contribution per unit = $40 - $31 = $9.

Original volume = 2,000

Add: Increase in volume = 400

New volume = 2,400

Multiplied by unit Contribution margin= $9

New contribution margin = $ 21,600

Less: Fixed expenses =($ 5,220)

New operating income = $16,380

Less: operating income before

change in volume =($12,780)

Change in operating income = $ 3,600

Percentage change in income

= ($3,600/$12,780) × 100

= 28.17%

Operating leverage = $21,600/$16,380 = 1.32