Question

Head-First Company had planned to sell 5,000 bicycle helmets at $76 each in the coming year. Unit variable cost is $51 (includes direct materials, direct labor, variable factory overhead, and variable selling expense). Total fixed cost equals $49,500 (includes fixed factory overhead and fixed selling and administrative expense). Operating income at 5,000 units sold is $75,500. The degree of operating leverage is 1.7. Now Head-First expects to increase sales by 10% next year.

Required:

1. Calculate the percent change in operating income expected.
%

2. Calculate the operating income expected next year using the percent change in operating income calculated in Requirement 1.
$

> No explanation to workings.

Answer 1

Computation of Percentage Change in Operating Income
Degree of Operating Leverage (A)	1.7 times
(X)Percentage of Change in Sales (B)	10%
Percentage change in Oprating Income ( AXB)	17%
Computation of Expected Operating Income - head First Company
Current Operating Income	$75,500.00
Add: Income Increased by (75500*17%)	$12,835.00
Expected Operating Income	$88,335.00

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