Question

D Chapter 20 handouts De Layout References Mailings Review View E20-35Computing degree of operating leverage Following is the income statement for Marrow Mufflers for the month of June 2018: MARROW MUFFLERS Contribution Margin Income Statement Month Ended June 30, 2018 Net Sales Revenue (140 units x 5250) Variable Costs (140 units X 550) Contribution Margin Fixed Costs Operating Income $ 35,000 7,000 28,000 11,500 $ 16,500 Requirements 1. Calculate the degree of operating leverage. (Round to four decimal places.) 2 Use the degree of operating leverage calculated in Requirement to estimate the change in operating income if total sales increase by 40% (assuming no change in sales price per unit). (Round interim calculations to four decimal places and final answer to the nearest dollar.) 67.8800% 3. Verify your answer in Requirement 2 by preparing a contribution margin income statement with the total sales increase of 40%.

Answer 1

Answer

1)

Operating Leverage=	Contribution/ Operating Income
		=28000/16500
	1.6969 times

2)

Operating Leverage=

%Change in Operating Income ÷% Change in Sales

consider %Change in Operating Income as 'x"

1.6969   =

x/16500÷40%

0.6788 =	x/16500
(1.6969*40%)

x(Change in operating income) =0.6788*16500 =

11200

  

3)

	MARROW MUFFLERS
Contribution Margin Income Statement
	Month Ended June 30,2018
	Net sales Revenue	$        49,000
	Variable cost	9800
	Contribution Margin	39200
	Fixed Costs	11500
	Operating Income	$        27,700
	Verification
	Change in operating income
	(27700-16500)	$        11,200