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	$	55,000
Variable expenses		33,000
Contribution margin		22,000
Fixed expenses		14,960
Net operating income	$	7,040

1-1. What is the break-even point in unit sales?

1-2. What is the break-even point in dollar sales?

1-3. How many units must be sold to achieve a target profit of $13,200?

2-1. What is the margin of safety in dollars? What is the margin of safety percentage?

	Margin of safety in dollars Margin of safety percentage %

2-2. What is the degree of operating leverage?

2-3. Using the degree of operating leverage, what is the estimated percent increase in net operating income of a 5% increase in sales?

3-1. 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 $14,960 and the total fixed expenses are $33,000. Under this scenario and assuming that total sales remain the same, what is the degree of operating leverage?

3-2. 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 $14,960 and the total fixed expenses are $33,000. Given this scenario and assuming that total sales remain the same. Using the degree of calculated operating leverage, what is the estimated percent increase in net operating income of a 5% increase in sales?

Answer 1

Facts of the Question:

Particulars	Per unit(in $)	For 1,000 units (in $)
Sales	55.00	55,000
Variable Expenses	33.00	33,000
Contribution Margin	22.00	22,000

Answer 1-1)

Calculation of Break-even point in unit sales

Break-even point (in Units) = (Total Fixed Cost)/Contribution margin per unit

                                                 = $ 14,960/$22.00

                                                 = 680 units

Therefore, the company needs to sell 680 units to break-even.

Answer 1-2)

Calculation of Break-even point in dollar sales

Break-even point (in dollar) =(Break-even point in units) X selling price per unit

                                                 = 680 units X $ 55.00 per unit

                                                 = $ 37,400.

Therefore, break-even point of the company is $ 37,400.

Answer 1-3)

Calculation of number of units to be sold to achieve target profit

Desired sales level (in units) =(Total Fixed Cost + Target Profit) /Contribution margin per unit

                                                 = ($14,960 + $13,200)/ $22.00

                                                 =1,280 units.

Therefore the company must sell 1,280 units to achieve profit level of $13,200.

Answer 2-1)

Calculation of margin of safety in dollars and as a percentage

Margin of Safety (in Dollars) = (Actual Sales) – (Break-even point)

                                                  = $ 55,000 - $ 37,400

                                                 = $ 17,600.

Therefore the margin of safety is $ 17,600.

Margin of Safety in percentage:

Margin of Safety (%) = [(Actual Sales – Break-even point)/Actual Sales] X 100

                                      = [($55,000 - $ 37,400)/$ 55,000] X 100

                                      = 32 %

Therefore the margin of safety is 32.00%.

Answer 2-2)

Particulars	For 1000 units (in $)
Sales	55,000
Variable Expenses	33,000
Contribution Margin	22,000
Fixed Expenses	14,960
Net Operating Income	7,040

Calculation of Degree of operating leverage

Degree of operating income = Contribution margin/ Net operating Income

                                                   = $22,000/$7,040

                                                   = 3.125 times

Therefore the degree of operating leverage is 3.125 times.

Answer 2-2)

Calculation of estimated percentage increase in Net operating income

Percentage increase in operating income = (Degree of operating leverage) X (percentage increase in sales)

                                                                            = 3.125 times X 5%

                                                                            = 15.625 %

Therefore, if there is a 5% increase in sales, the net operating income will increase by 15.625%.

Answer 3-1)

Particulars	For 1000 units (in $)
Sales	55,000
Variable Expenses	14,960
Contribution Margin	40,040
Fixed Expenses	33,000
Net Operating Income	7,040

Calculation of degree of operating leverage if the variable cost is $ 14,960 and fixed cost is $ 33,000.

Degree of operating income = Contribution margin/ Net operating Income

                                                   = $40,040/$7,040

                                                   = 5.6875 times

Therefore the degree of operating leverage is 5.6875 times.

Answer 3-2)

Calculation of estimated percentage increase in Net operating income if the variable cost is $ 14,960 and fixed cost is $ 33,000.

Percentage increase in operating income = (Degree of operating leverage) X (percentage increase in sales)

                                                                            = 5.6875 times X 5%

                                                                            = 28.4375 %

Therefore, if there is a 5% increase in sales, the net operating income will increase by 28.4375%.