Question

Ringsmith Company is considering two different processes to make its product—process 1 and process 2. Process 1 requires Ringsmith to manufacture subcomponents of the product in-house. As a result, materials are less expensive, but fixed overhead is higher. Process 2 involves purchasing all subcomponents from outside suppliers. The direct materials costs are higher, but fixed factory overhead is considerably lower. Relevant data for a sales level of 25,000 units follow:

		Process 1		Process 2
Sales		$6,600,000		$6,600,000
Variable expenses		2,725,000		3,650,000
Contribution margin		$3,875,000		$2,950,000
Less total fixed expenses		3,610,565		1,423,780
Operating income		$264,435		$1,526,220
Unit selling price		$264		$264
Unit variable cost		$109		$146
Unit contribution margin		$155		$118

Required:

1. Compute the degree of operating leverage for each process. Round your answers to one decimal place. Use the rounded answers in subsequent calculations.

Process 1
Process 2

2. Suppose that sales are 20 percent higher than budgeted. By what percentage will operating income increase for each process?

Process 1		%
Process 2		%

What will be the increase in operating income for each system? Round your answers to the nearest dollar.

Process 1	$
Process 2	$

What will be the total operating income for each process? Round your intermediate calculations and final answers to the nearest dollar. Use the rounded answers in subsequent calculations.

Process 1	$
Process 2	$

3. What if unit sales are 10 percent lower than budgeted? By what percentage will operating income decrease for each process?

Process 1		%
Process 2		%

What will be the total operating income for each process? Round your answers to the nearest dollar.

Process 1	$
Process 2	$

Answer 1

The answer has been presented in the supporting sheet. For detailed answer refer to the supporting sheet.