Question

Brown sells tiling grout and reports the following data:

Kilograms produced and sold	625,000 kg
Sales revenue
$5,625,000
Variable manufacturing expense
1,875,000
Fixed manufacturing expense
1,000,500
Variable selling and administrative expense
625,000
Fixed selling and administrative expense
562,000
Net operating income
$ 1,562,500

Calculate the company’s operating leverage if sales decrease by 10%.

Answer 1

Answer:

New Sales Revenue = Sales – Sales *10%
New Sales Revenue = $5,625,00 - $5,625,000*10%
New Sales Revenue = $5,625,000 - $562,500
New Sales Revenue = $5,062,500

New Variable Manufacturing Expenses = Variable Manufacturing Expenses – Variable Manufacturing Expenses*10%
New Variable Manufacturing Expenses = $1,875,000 - $1,875,000*10%
New Variable Manufacturing Expenses = $1,875,000 - $187,500
New Variable Manufacturing Expenses = $1,687,500

New Variable Selling and Administrative Expense = Variable Selling and Administrative Expenses – Variable Selling and Administrative Expense *10%
New Variable Selling and Administrative Expense =$625,000 - $625,000*10%
New Variable Selling and Administrative Expenses = $625,000 - $62,500
New Variable Selling and Administrative Expenses = $562,500

Contribution Margin = Sales Revenue – Variable Manufacturing Expenses – Variable Selling and Administrative Expenses
Contribution Margin = $5,062,500 - $1,687,500 - $562,500
Contribution Margin = $2,812,500

Net Operating Income = Contribution Margin – Fixed Manufacturing Expenses – Fixed Selling and Administrative Expenses
Net Operating Income = $2,812,500 - $1,000,500 - $562,000
Net Operating Income = $1,250,000

Operating Leverage = Contribution Margin / Net Operating Income
Operating Leverage = $2,812,500 / $1,250,000
Operating Leverage = 2.25