Question

13.What is the degree of operating leverage?

14.Using the degree of operating leverage, what is the estimated percent increase in net operating income of a 5% increase in sales?

15.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 $8,400 and the total fixed expenses are $21,000. Under this scenario and assuming that total sales remain the same, what is the degree of operating leverage?

16. 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 $8,400 and the total fixed expenses are $21,000. 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 5% increase in sales?

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): Sales Variable expenses Contribution margin Fixed expenses Net operating income $ 35,000 21,000 14,000 8,400 $ 5,600

Answer 1

13. Degree of operating leverage = Contribution margin / Net operating income

= $14,000 / $5,600

= 2.5 times

14. Estimated percenatge increase in net operating income = 2.5 * 5% = 12.5%

15.

Sales	$35,000
Variable expenses	$8,400
Contribution margin	$26,600
Fixed expenses	$21,000
Net operating income	$5,600

Degree of operating leverage = Contribution margin / Net operating income

= $26,600 / $5,600

= 4.75 times

16. Estimated percenatge increase in net operating income = 4.75 * 5% = 23.75%