Question

Financial

Question 1

During 2018, Saga Sports Limited sold 100,000 soccer balls, total sales were $2,000,000, total variable expenses were $1,200,000, and fixed expenses were $400,000.

Required:
1. Compute the degree of operating leverage for Saga Sports Limited.

2. Using the degree of operating level calculated above, estimate the change in the company's net operating income if its sales increase by 10%. DO NOT prepare a new proposed income statement. Just estimate the change in the amount of net operating income.

Answer 1

1) Degree of operating leverage = Contribution margin/Operating income

Contribution margin = Total sales - Total variable cost

= 2000000-1200000

= 800,000 $

Operating income = Contribution margin - fixed cost

=800,000 - 400,000

= $400,000

Thus Degree of operating leverage = 800000/400000 = 2

2) DOL = % Change in operating income/% change in sales

= 2 = % Change in operating income/10%

=% Change in operating income = 20%

Thus Operating income = 400000(1.2)

= 4,80,000 $