Question

Oslo Company prepared the following contribution format income statement based on a sales volume of 1,000 units (the relevant range of production is 500 units to 1,500 units):

  

Sales	$	23,900
Variable expenses		13,300
Contribution margin		10,600
Fixed expenses		7,632
Net operating income	$	2,968

   

Required:

What is the degree of operating leverage

Oslo Company prepared the following contribution format income statement based on a sales volume of 1,000 units (the relevant range of production is 500 units to 1,500 units):

  

Sales	$	24,500
Variable expenses		13,500
Contribution margin		11,000
Fixed expenses		7,700
Net operating income	$	3,300

1. If the variable cost per unit increases by $1.50, spending on advertising increases by $2,000, and unit sales increase by 250 units, what would be the net operating income?

2.What is the break-even point in unit sales?

3. How many units must be sold to achieve a target profit of $7,150?

Answer 1

Degree of Operating Leverage =Contribution Margin/Net operating income
Degree of Operating Leverage =$10,600 / $2,968 =3.57
Oslo Company
Contribution Income Statement
	Amount	Per unit	Percent
Sales(1,250 units*24.50)	$                       30,625	$                          24.50	100.00%
Variable Costs(1,250 units*$15)	$                       18,750	$                          15.00	61.22%
Contribution Margin	$                       11,875	$                            9.50	38.78%
Fixed Costs($7,700+$2,000)	$                         9,700
Net Operating Income	$                         2,175
Break-even point in units sales =$9,700 / $9.50 =1,021 units
Target Profit	$                         7,150
Add:Fixed Costs	$                         9,700
Target Contribution Margin	$                       16,850
Contribution Margin per unit	$                           9.50
Units Sold($16,850/$9.50)	1774	units