Oslo Company prepared the following contribution format income statement based o

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):

11-A What is the margin of safety in dollars? (Do not round intermediate calculations.).

11- b What is the margin of safety percentage? (Round your final answers to the nearest whole percentage (i.e, .12 should be entered as 12).)

12. What is the degree of operating leverage? (Round your answer to 2 decimal places.)

Using the degree of operating leverage, what is the estimated percent increase in net operating income of a 4% increase in sales? Do not round intermediate calculations. Round your percentage answer to 2 decimal places (i.e .1234 should be entered as 12.34).

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 $7,708 and the total fixed expenses are $12,700. 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.)

  Sales $ 22,100       Variable expenses 12,700       Contribution margin 9,400       Fixed expenses 7,708       Net operating income $ 1,692    

Explanation / Answer

Solution:

(A). Break-Even Point Caluculation:

  Break-Even Sales = 7,708 / 22.1 - 12.7

= 7,708 / 9.4

   = 820

(B). Break-Even Point in Sales Caluculation:

Break-Even Sales = 22,100 - 7,708

   = 14,392

  

(C). Margin of Safety Sales in Dollars:

Margin of Safety Sales = 22,100 -  14,392

= 7,708 Sales

(D). Margin of Safety Percentage:

Margin of Safety Percentage = 22,100 - 7,708 / 22,100 * 100

   = 14,392 / 22,100 * 100

   = 0.65122 * 100

= 65.122%

(E). Degree of Operating Leverage:

   Degree of Operating Leverage = 9,400 / 1,692

   = 5.555

(F). If Increase the Net Operating Income 4% in Sales:

   Sales 22,100 * 4 / 100 = 884

   Actual Net Operating Income = 1,692 + 884

= 9,400 / 2,576

   = 3.64%

   = Contribution Margin / Net Operating Income

   = 9,

Break-Even Sales = Fixed Cost / Selling Price Per Unit - Variable Cost Per Unit

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