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Oslo Company prepared the following contribution format income statement based on a sales volume of 1,000...


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 $ 20,000
Variable expenses 12,000
Contribution margin 8,000
Fixed expenses 6,000
Net operating income $ 2,000

1. What is the break-even point in dollar sales? ($15,000)

2. What is the degree of operating leverage? ?

3. Using the degree of operating leverage, what is the estimated percent increase in net operating income of a 5% increase in sales? (Increase in net operating income)

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 $6,000 and the total fixed expenses are $12,000. Under this scenario and assuming that total sales remain the same, what is the degree of operating leverage? (Degree of operating leverage)

Solutions

Expert Solution

Oslo Company

  1. Break-even point in dollar sales –

Break-even point in dollar sales = fixed cost/CM ratio

CM = 8,000/20,000 = 40%

Fixed cost = $6,000

Break-even point in dollar sales = 6,000/40% = $15,000

  1. Degree of operating leverage –

Degree of operating leverage = contribution/net income

Contribution = $8,000

Net income = $2,000

Degree of operating leverage = 8,000/2,000 = 4

  1. Determination of estimated % increase in net income with a 5% increase in sales:

Estimated increase in net operating income = % increase in sales x Degree of operating leverage

= 5% x 4 = 20%

Hence, a 5% increase in sales would cause net operating income to increase by 20%.

  1. Computation of Degree of operating leverage assuming reversal of variable and fixed expenses:

Revised expenses –

Variable expenses = $6,000

Fixed expenses = $12,000

Now Contribution margin = $20,000 - $6,000 = $14,000

Net operating income = $14,000 - $12,000 = $2,000

Degree of operating leverage = contribution/net income

= $14,000/$2,000 = 7

Hence, Degree of operating leverage = 7


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