Drewery Inc. has fixed costs of $50,000 and net operating income of $17,000. If

Question

Drewery Inc. has fixed costs of $50,000 and net operating income of $17,000. If sales increase by 18%, by how much will NOI increase? What would happen to NOI if sales decreased by 20%?

Drewery Inc. has fixed costs of $50,000 and net operating income of $17,000. If sales increase by 18%, by how much will NOI increase? What would happen to NOI if sales decreased by 20%? (Degree of Operating Leverage) Drewery Inc. has fixed costs of $50,000 and net operating income of $17,000. If sales increase by If sales increase by 18 % by how much will NOI increase? What would happen to NOI if sales decreased by 20%? If sales increase by 18%, the change in NOI will be an increase of % (Select from the drop down menu and round to two decimal places.) If sales decrease by 20%, do change in NOI will be a decrease of % (Select from the drop-down mend and round to decimal places.)

Explanation / Answer

Fixed Cos t= $50000

Net opearing INcome = $17000

Contribution margin = NOI +Fixed COst

Contribution MArgin = $50000+$17000

CM = $67000

Degree of opearating Leverage = Contribution Magin/ net opearating income

DOI = 67000/17000

DOI = 3.94%

If sales increases by 18 % , Net operating income will change by the following

= Percentage change in sales x DOI

= 18% x3.94%

= 70.92% , the Opearting income will increase by 70.92%

If sales decreasesby 20% , Net operating income will change by the following

= Percentage change in sales x DOI

= 20% x 3.94%

= 78.8% , the operating income will decrease by 78.8%

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