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In: Accounting

Question No-1 Potato companies’ most recent income statement is shown below: Total Per Unit Sales (30,000...

Question No-1

Potato companies’ most recent income statement is shown below:

Total

Per Unit

Sales (30,000 units)

$ 150,000

$5

(-) Variable Expenses

       90,000

3

Contribution Margin

60,000

2

(-)Fixed expenses

50,000

Net operating income

10,000

Required:

  1. Compute the company’s degree of operating leverage.
  2. Using the degree of operating leverage, estimate the impact on net operating income of a 10%increase in sales.
  3. Verify your estimate from part (d) above by constructing a new contribution format income statement for the company assuming a 10% increase in sales.
  4. Determine the margin of safety in percentage.
  5. Prepare a new income statement considering that variable expenses will increase 20 cents per unit, the selling price will increase 12%, and the sales volume will be decreased by 10%. Will you suggest the change?

Solutions

Expert Solution

operating leverage of a company state the tendancy of operating income (EBIT) to change disproportionately with the change of sales. it also show the company's capacity to pay its variable and fixed cost expense within the revenue generated.

Net operating income will change with the change in sales.

in this above question i solve ques from alternative method also.

ekkarill92 answered 1 year ago
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