In: Accounting
equired information
[The following information applies to the questions displayed below.]
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 | $ | 20,000 |
Variable expenses | 12,000 | |
Contribution margin | 8,000 | |
Fixed expenses | 6,000 | |
Net operating income | $ | 2,000 |
11. What is the margin of safety in dollars? What is the margin of safety percentage?
12. What is the degree of operating leverage?
13. Using the degree of operating leverage, what is the estimated percent increase in net operating income of a 5% increase in unit sales?
14. Assume that the amounts of the company’s total variable expenses and total fixed expenses were reversed. In other words, assume that the total variable expenses are $6,000 and the total fixed expenses are $12,000. Under this scenario and assuming that total sales remain the same, what is the degree of operating leverage?
15. Assume that the amounts of the company’s total variable expenses and total fixed expenses were reversed. In other words, assume that the total variable expenses are $6,000 and the total fixed expenses are $12,000. Using the degree of operating leverage, what is the estimated percent increase in net operating income of a 5% increase in unit sales?
Req 11. | |||||
Contribution margin ratio= Contribution / Sales *100 | |||||
8000 / 20000*100 = 40% | |||||
Margin of Sfety in $: | |||||
Net income | 2000 | ||||
Divide: CM ratio | 40% | ||||
Margin of safety in $ | 5000 | ||||
Margin of safety as % of Total | |||||
Margin of safety in $ | 5000 | ||||
Divide: Total sales | 20000 | ||||
Margin of safety as % of Total | 25% | ||||
Req 12 | |||||
Degree of operating leverage: | |||||
Contribution | 8000 | ||||
Divide: Net Income | 2000 | ||||
Degree of operating leverage: | 4 | ||||
Req 13. | |||||
% incraese in sales | 5% | ||||
Multiply: Degree of operating leverage | 4 | ||||
% incrrease in Income | 20% | ||||
Req 14. | |||||
Sales | 20000 | ||||
Less: variable cost | 6000 | ||||
Contribution | 14000 | ||||
Less: Fixed cost | 8000 | ||||
Net income | 6000 | ||||
Degree of operating leverage: | |||||
Contribution | 14000 | ||||
Divide: Net Income | 6000 | ||||
Degree of operating leverage: | 2.33 | ||||
Req 15. | |||||
% incraese in sales | 5% | ||||
Multiply: Degree of operating leverage | 2.33 | ||||
% incrrease in Income | 11.65% | ||||