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
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.) 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? (Round your answer to 2 decimal places.) 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? (Round your intermediate calculations and final answer to 2 decimal places.)

Answer 1

1.)DEGREE OF OPERATING LEVERAGE

CONTRIBUTION MARGIN / NET OPERATING INCOME

$22000/7040 = 3.125 OR ROUND TO 3.13

INCREASE IN NET INCOME IF 5 % INCREASE IN SALE

DEGREE OF OPERATING LEVERAGE * PERCENT INCREASE IN SALES

3.13*5 = 15.65 %

INCOME WILL BE INCREASE BY 15.65 % IF SALES IS INCREASE BY 5%

2.) DEGREE OF OPERATING LEVERAGE IF EXPENSES ARE REVERSED

DEGREE OF OPERATING LEVERAGE = CONTRIBUTION / OPERATING INCOME

CONTRIBUTION = SALES - VARIABLE COST

$55000-$14960 =$40040

INCOME= SALES - VARIABLE EXPENSES - FIXED COST

$55000- $14960-$33000= $7040

DEGREE OF OPERATING LEVERAGE

$40040/7040= 5.6875 OR ROUND TO 5.69

3.) INCREASE IN NET INCOME IF EXPENSES ARE REVERSED AND SALES IS INCREASE BY 5% BY USING DEGREE OF OPRATING LEVERAGE

DEGREE OF OPERATING LEVRAGE IF EXPENSED ARE REVERSED CALCULATED IN PART 2 = 5.69

INCREASE IN SALES 5%

INCREASE IN NET INCOME = DEGREE OF OPERATING LEVERAGE * PERCENT INCREASE IN SALES

5.69*5 = 28.45 %

INCREASE IN INCOME IF SALES IS INCREASE BY 5 % = 28.45 %