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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	$	40,000
Variable expenses		26,000
Contribution margin		14,000
Fixed expenses		8,680
Net operating income	$	5,320

1. What is the degree of operating leverage? (Round your answer to 2 decimal places.)

2. Using the degree of operating leverage, what is the estimated percent increase in net operating income of a 5% increase in sales? (Round your intermediate calculations and final answer to 2 decimal places.)

3. 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 $8,680 and the total fixed expenses are $26,000. 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.)

4. 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 $8,680 and the total fixed expenses are $26,000. 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? (Round your intermediate calculations and final answer to 2 decimal places.)

Answer 1

1. Degree of Operating Leverage (DOL)

DOL = Contribution Margin / Operating Income

= $14000 / $5320

= 2.63

2. The estimated percent increase in net operating income of a 5% increase in sales

A 5% increase in sales should result in a 13.15% increase in net operating income, computed as follows:

Degree of operating leverage (a) 2.63

Percent increase in sales (b) 5%

Percent increase in net operating income(a) × (b) 13.15%

3. Degree of operating leverage

The degree of operating leverage is calculated as follows:

Contribution margin (a) $31,320

Net operating income (b) $5,320

Degree of operating leverage (a) ÷ (b) 5.89

4. Using the scenario given in point 3, the estimated percent increase in net operating income of a 5% increase in sales-

A 5% increase in sales should result in 29.45% increase in net operating income, computed as follows:

Degree of operating leverage (a) 5.89

Percent increase in sales (b) 5%

Percent increase in net operating income(a) × (b) 29.45%