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	$	100,000
Variable expenses		65,000
Contribution margin		35,000
Fixed expenses		30,100
Net operating income	$	4,900

10a. How many units must be sold to achieve a target profit of $21,000?

10b. What is the margin of safety in dollars? What is the margin of safety percentage?

10c. What is the degree of operating leverage?

10d. Using the degree of operating leverage, what is the estimated percent increase in net operating income of a 5% increase in sales?

Answer 1

Part-10 (a):-

Number of units must be sold = (Target contribution/contribution per unit)

=

(51,100/35) = 1,460

Target contribution =Fixed Cost + Target Profit = (30,100+21,000) = $51,100

Part-10 (b):-

Margin of safety in Dollars =(Total sales - Break even sales)

=

(100,000-86,000) = 14,000

Break even sales = (Fixed Cost/Contribution per Unit)* Selling price

=

(30,100/ (35,000/1,000))*(100,000/100) = 86,000

Margin of safety in Percentage = (Margin of safety/Total sales)

=

(14,000/100,000) = 0.14

Part-10 (c):-

Degree of operating leverage = (Contribution Margin / Net Income)

=

(35,000/4,900) = 7.14

Part-10 (d):-

Percentage increase in net operating income = (Degree of operating leverage * Increase in sales)

=

(7.14*5%) = 0.36