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): 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 5% increase in sales? 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 $7,772 and the total fixed expenses are $13,800. Under this scenario and assuming that total sales remain the same, what is the degree of operating leverage? 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 $7,772 and the total fixed expenses are $13,800. Given this scenario, and assuming that total sales remain the same, calculate the degree of operating leverage. Using the calculated degree of operating leverage, what is the estimated percent increase in net operating income of a 5% increase in sales

Explanation / Answer

1. Operating leverage is calculated bvy below mentioned formula

Sales- variable Cost/ Sales- variable Cost- Fixed Costs

= 25,400-13,800 / 25,400- 13,800- 7,772

= 3.03

2.

As Operating leverage = % increase in operating income/ % increase in sales

So % increase in operating Income = 3.03*5%

= 0.1515 % increase in operating income.

3.

Degree of opearting leverage when variable and fixed expenses are reversed is calculated as under:

Sales- variable Cost/ Sales- variable Cost- Fixed Costs

= 25,400-7,772 / 25,400- 7,772- 13,800

= 4.61

4.

Degree of opearting leverage when variable and fixed expenses are reversed is calculated as under:

Sales- variable Cost/ Sales- variable Cost- Fixed Costs

= 25,400-7,772 / 25,400- 7,772- 13,800

= 4.61

As Operating leverage = % increase in operating income/ % increase in sales

So % increase in operating Income = 4.61*5%

= 0.2305 % increase in operating income.

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