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	$	23,000
Variable expenses		13,000
Contribution margin		10,000
Fixed expenses		8,500
Net operating income	$	1,500

What is the contribution margin per unit?

If the variable cost per unit increases by $.50, spending on advertising increases by $1,000, and unit sales increase by 250 units, what would be the net operating income? What is the degree of operating leverage? (Round your answer to 2 decimal places.) Using the degree of operating leverage, what is the estimated percent increase in net operating income of a 4% increase in sales? Do not round intermediate calculations. Round your percentage answer to 2 decimal places (i.e .1234 should be entered as 12.34) 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 $8,500 and the total fixed expenses are $13,000. Under this scenario and assuming that total sales remain the same, what is the degree of operating leverage?

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 $8,500 and the total fixed expenses are $13,000. Given this scenario, and assuming that total sales remain the same, calculate the degree of operating leverage. Using the calculated degree of operating leverage, what is the estimated percent increase in net operating income of a 4% increase in sales?

Answer 1

Answer

1.

Contribution Margin per unit = Contribution Margin / No. of Units Sold

= $10,000 / 1000 units

Contribution Margin per unit =$10 per unit

Units Sold (1000+250 Units)	1250
Sales ($23*1250 Units)	28750
Variable Expenses ($13.5*1250 Units)	16875
Advertisement	1000
Contribution Margin	10875
Fixed Expenses	8500
Net Operating Income (EBIT)	2375

3.

Degree of Operating Leverage = Contribution / EBIT

OR

% Change in EBIT / % Change in Sales

Degree of Operating Leverage = Contribution / EBIT

= 10,000 / 1500

Degree of Operating Leverage = 6.67

4.

Degree of Operating Leverage = % Change in EBIT / % Change in Sales

6.67= % Change in EBIT / 4%

% Change in EBIT = 6.67 * 4%

Increase in Net Operating Income or EBIT = 26.68%

5.

Units Sold	1000
Sales ($23*1000 Units)	23000
Variable Expenses ($8.5*1000 Units)	8500
Contribution Margin	14500
Fixed Expenses	13000
Net Income	1500

Net Income will remain same.

Degree of Operating Leverage = Contribution / EBIT

= 14,500 / 1500

Degree of Operating Leverage = 9.67