Question
In: Accounting
Suppose Katie sells 1800 posters. Use the following financial data ($32 sales price, $27 variable cost,...
Suppose Katie sells 1800 posters. Use the following financial data ($32 sales price, $27 variable cost, $2800 fixed expenses) to compute her operating leverage factor. If sales volume increases 12%, by what percent will Katie's operating income change? Prove your answer.
First, identify the formula, then compute the operating leverage factor. (Round your answer to two decimal places.)
|
Contribution margin |
/ |
Operating income |
= |
Operating leverage factor |
|
/ |
= |
If sales volume increases 16% by what percent will Katie's operating income change? (Round the percentage change to one decimal place, X.X%)
Operating income will increase by --- %.
Prove your answer. (Round the percentage change to one decimal place, X.X%)
|
Original volume (posters) |
||
|
Add: Increase in volume |
||
|
New volume (posters) |
||
|
Multiplied by: Unit contribution margin |
||
|
New total contribution margin |
||
|
Less: Fixed expenses |
||
|
New operating income |
||
|
Less: Operating income before change in volume |
||
|
Increase in operating income |
||
|
Percentage change |
% |
Solutions
Expert Solution
| a)Operating leverage = Contribution / EBIT |
| =$9000/6200=1.45 |
|
**Contribution Margin=(sales-VC) X Unit =(32-27)*1800=9000 |
| ** Operating Income= Contribution Margin-Fixed Expense |
| =$9000-$2800=6200 |
| b) increase in Operating Income , if Sales Increase by 16% |
| =Degree of Operating Leverage X % of Sales Increase |
| =1.45X 12%=17.4% |
| Hence Operating Will Increase by 17.4% |
| b) increase in Operating Income , if Sales Increase by 16% |
| =Degree of Operating Leverage X % of Sales Increase |
| =1.45X 16%=22.4% |
| Hence Operating Will Increase by 22.4% |
| Prove answer for increase in sales by 12% | |
| Original volume (posters) | 1800 |
| Add: Increase in volume (1800*12%) | 216 |
| New volume (posters) | 2016 |
| Multiplied by: Unit contribution margin (32-27) | $5.00 |
| New total contribution margin (2016*5) | $10,080.00 |
| Less: Fixed expenses | $2,800.00 |
| New operating income | $7,280.00 |
| Less: Operating income before change in volume | $6,200.00 |
| Increase in operating income | $1,080.00 |
| Percentage change (1080/6200) | 17.4% |
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