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

If sales increase to 1,001 units, what would be the increase in net operating income? (Round your answer to 2 decimal places.) If the selling price increases by $1.50 per unit and the sales volume decreases by 100 units, what would be the net operating income? (Do not round intermediate calculations.) 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? (Do not round intermediate calculations.) How many units must be sold to achieve a target profit of $5,750? (Do not round intermediate calculations.) 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? (Round your answer to 2 decimal places.) 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? Do not round intermediate calculations. Round your percentage answer to 2 decimal places (i.e .1234 should be entered as 12.34).

Answer 1

Calculation of increase in Net operating income when increase in production units -

	Particulars	Amt.$	Per unit	Amt.$
	sales volume in units	1000		1001
	Sales	23000	23	23023
less	variable expenses	13000	13	13013
	Contribution margin	10000	10	10010
less	Fixed expenses	8500	8.5	8500
	Net operating income	1500	1.5	1510

Increase in net operating income = 10

2. Calculation of Net operating income If selling price increase by 1.50 and volume decrease by 100 units -

	Particulars	Amt.$	Per unit	Amt.$
	sales volume in units	1000		900
	Sales	23000	23	22050
less	variable expenses	13000	13	11700
	Contribution margin	10000	10	10350
less	Fixed expenses	8500	8.5	8500
	Net operating income	1500	1.5	1850

3. calculation of net operating income when variable cost increases by 0.50 and advertisment expense increases by 1000

	Particulars	Per unit	Amt.$
	sales volume in units		1250
	Sales	23	28750
less	variable expenses	13.5	17500
	Contribution margin	10	11250
less	Fixed expenses + advertising exp.	9.5	9500
	Net operating income	0.5	1750

4. desired profit = 5750

so unit sold to achieved desired profit = (Fixed expenses + desired profit )/sales price per unit - varibale cost per unit

= (8500+5750)/(23 - 13)

= 1425 units

Degree of operating leverage = contribution/EBIT

= % change in EBIT / % change in sales

= 283.33/ 42.5

= 6.66

DOL = % EBIT / % sales

6.66 = % EBIT /4%

% EBIT = 6.66*4%

= 26.64%

calculation of DOL after reversible -

	Particulars	Amt.$	Per unit	for pt. of $ 5750
	sales volume in units	1000		1425
	Sales	23000	23	32775
less	variable expenses	8500	8.5	12112.5
	Contribution margin	14500	14.5	20662.5
less	Fixed expenses + advertising exp.	13000	13	13000
	Net operating income	1500	1.5	7662.5

% change in Net operating income = 6162.5/1500 = 4.10833 or 410.833

% change in Sales = 9775/23000 = .425 or 42.5%

DOL = 410.833/42.5

= 9.66

now if net sales increases by 4% then net operating income = 9.66*4 = 38.67

Please note all values are in $.

In case of any clarification required plesae comment.