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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	$	95,000
Variable expenses		57,000
Contribution margin		38,000
Fixed expenses		31,920
Net operating income	$	6,080

5. If sales decline to 900 units, what would be the net operating income?

6. If the selling price increases by $2 per unit and the sales volume decreases by 100 units, what would be the net operating income?

7. If the variable cost per unit increases by $1, spending on advertising increases by $1,850, and unit sales increase by 270 units, what would be the net operating income?

8. What is the break-even point in unit sales?

9. What is the break-even point in dollar sales?

10. How many units must be sold to achieve a target profit of $22,800?

11. What is the margin of safety in dollars? What is the 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 $31,920 and the total fixed expenses are $57,000. 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 $31,920 and the total fixed expenses are $57,000. 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

If sales volume is 1,000 units:

Selling Price = Sales / Sales Volume
Selling Price = $95,000 / 1,000
Selling Price = $95

Variable Expenses per unit = Variable Expenses / Sales Volume
Variable Expenses per unit = $57,000 / 1,000
Variable Expenses per unit = $57

Contribution Margin per unit = Contribution Margin / Sales Volume
Contribution Margin per unit = $38,000 / 1,000
Contribution Margin per unit = $38

Answer 5.

If sales volume is 900 units:

Net Operating Income = Sales Volume * Contribution Margin per unit - Fixed Expenses
Net Operating Income = 900 * $38 - $31,920
Net Operating Income = $2,280

Answer 6.

If sales volume decreases by 100 units and selling price increases by $2 per unit:

Selling Price = $95 + $2
Selling Price = $97

Variable Expenses per unit = $57

Contribution Margin per unit = Selling Price - Variable Expenses per unit
Contribution Margin per unit = $97 - $57
Contribution Margin per unit = $40

Net Operating Income = Sales Volume * Contribution Margin per unit - Fixed Expenses
Net Operating Income = 900 * $40 - $31,920
Net Operating Income = $4,080

Answer 7.

If sales volume increases by 270 units, variable expenses per unit increases by $1 and fixed expenses increase by $1,850:

Variable Expenses per unit = $57 + $1
Variable Expenses per unit = $58

Sales volume = 1,000 + 270
Sales volume = 1,270

Fixed Expenses = $31,920 + $1,850
Fixed Expenses = $33,770

Contribution Margin per unit = Selling Price - Variable Expenses per unit
Contribution Margin per unit = $95 - $58
Contribution Margin per unit = $37

Net Operating Income = Sales Volume * Contribution Margin per unit - Fixed Expenses
Net Operating Income = 1,270 * $37 - $33,770
Net Operating Income = $13,220

Answer 8.

Contribution Margin per unit = $38
Fixed Expenses = $31,920

Breakeven point in unit sales = Fixed Expenses / Contribution Margin per unit
Breakeven point in unit sales = $31,920 / $38
Breakeven point in unit sales = 840

Answer 9.

Selling Price = $95
Contribution Margin per unit = $38
Fixed Expenses = $31,920

Contribution Margin Ratio = Contribution Margin per unit / Selling Price
Contribution Margin Ratio = $38 / $95
Contribution Margin Ratio = 40%

Breakeven point in unit sales = Fixed Expenses / Contribution Margin Ratio
Breakeven point in unit sales = $31,920 / 0.40
Breakeven point in unit sales = $79,800