Question

The Following is the income statement for Jackie Cafe for the month of May 2019. During the month, Jackie Cafe sold 2,000 units (production equals sales), and price per unit is $17: Sales Revenue Variable Costs Contribution Margin Fixed Costs Operating Income 34,000 15,000 19,000 15.000 4,000 Requirement 1 (3 points): Calculate the degree of operating leverage Requirement 2 (3 points): Using the degree of operating leverage, estimate the change in operating income if total sales decrease 20% (assume no change in sales price per unit) Requirement 3 (4 points): Verify your answer in Requirement 2 by preparing a contribution margin income statement with the total sales decrease of 20%.

Answer 1

a) Degree of operating leverage = Contribution margin/Operating income = 19000/4000 = 4.75

b) Operating income decrease by (20*4.75) = 95%

c) Contribution margin income statement

Sales (34000*80%)	27200
variable cost (15000*80%)	-12000
Contribution margin	15200
Fixed cost	-15000
Operating income	200