4. Assume that the operating results for last year were: Sales Variable expenses

Question

4. Assume that the operating results for last year were: Sales Variable expenses $ 2,080,000 1,040,000 Contribution margin Fixed expenses 1,040,000 180,000 Net operating income $ 860,000 a. Compute the degree of operating leverage at the current level of sales. (Round your answer to 2 decimal places.) gree of operating b. The president expects sales to increase by 11% next year. By what percentage should net operating income increase? (Round intermediate calculations to 2 decimal places and final answer to the nearest percentage.) operating income increases by Type here to search F1 F2 F3 F4 F5 F6FF8F 8 2 3 4 5 6

Explanation / Answer

Req a: Degree of Operating Leverage: Contribution / Net Operating income ($ 1040,000 /860,000) = 1.21 Degree of Operating leverage 1.21 Req B: Percentage Increase in Sales: 11% DOL 1.21 Therefore, % Increase in net profits is 13.31% (i.e. 1.21*11%) % increase in Profits: 13.30% Req C: Last Year., Selling price (2080,000 /31500 units) = $66.03 CONTRIBUTION INCOME STATEMENT LAST YEAR PROPOSED 31500 UNITS 47250 UNITS TOTAL PER UNIT TOTAL PER UNIT Sales revenue 2080000 66.03 2683328 56.79 Less: Variable expense 1040000 33.02 1560195 33.02 Contribution margin 1040000 33.02 1123133 23.77 Less: Fixed cost 180000 245000 Net operating income 860000 878132.5

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