aldovar company produces a variety of chemicals. One division makes reagents for

Question

aldovar company produces a variety of chemicals. One division makes reagents for laboratories. The divisions projected income statement for the coming year is:

Sales (203,000 units @ $70)             $14,210,000

total variable cost                              8,120,000

Contribution margin                           $6,090,000

Total fixed cost                                 4,495,000

Operating income                             $1,144,500

Compute the degree of operating leverage based on the orginal income statement. If sales revenue are 8% greater than expected, what is the percentage increase in operating income? (Note: round operating leverage to two decimal places.

Explanation / Answer

Degree of operating leverage = contribution margin / operating income

Degree of operating leverage = 6090000/1144500 = 5.32 approx.

Degree of operating leverage measures change in operating income due to change in sales.

Here, sales increases by 8%

Then, percentage increase in operating income = 5.32*8% = 42.56%

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