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	$	15,000
Variable expenses		9,000
Contribution margin		6,000
Fixed expenses		3,120
Net operating income	$	2,880
11. What is the margin of safety in dollars? What is the margin of safety percentage? margin of safety in dollars____ margin of safety percentage____ 12. What is the degree of operating leverage? (Round your answer to 2 decimal places.) 13. 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.) 14. 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 $3,120 and the total fixed expenses are $9,000. 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.) 15. 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 $3,120 and the total fixed expenses are $9,000. 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

11	Given sales units = 1000 units
	CONTRIBUTION MARGIN = $6000
	Contribution margin per unit = $6000/1000 = $6 per unit
	Net Operating income = $2880
	contribution margin ratio = $6000/$15000 = 0.4
	margin of safety = net operating income/contribution margin ratio = $2880/0.4 = $7200
	margin of safety% = $7200/15000 =48%
12	degree of operating leverage = contribution margin/net operative income
			=$6000/$2880 = 2.08
13	expected increase in sales = 5%
	degree of operating leverage = 2.08
	expected increase in net operating income = degree of operating leverage*percentage increase in sales=2.08*5% = 10.4%
14	particulars	amount
	sales	15000
	less variable expenses	3120
	contribution margin	11880
	less:fixed expenses	9000
	net operating income	2880
	therefore degree of operating leverage = 11880/2880 = 4.13
15	expected increase in net operating income = 4.125*5% = 20.65%