In: Accounting
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)
Oslo Company
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
Degree of operating leverage = contribution/net income
Contribution = $8,000
Net income = $2,000
Degree of operating leverage = 8,000/2,000 = 4
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%.
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