Question

1. Degree of Operating Leverage, Percent Change in Profit

   Ringsmith Company is considering two different processes to make its product—process 1 and process 2. Process 1 requires Ringsmith to manufacture subcomponents of the product in-house. As a result, materials are less expensive, but fixed overhead is higher. Process 2 involves purchasing all subcomponents from outside suppliers. The direct materials costs are higher, but fixed factory overhead is considerably lower. Relevant data for a sales level of 37,000 units follow:

   		Process 1		Process 2
   Sales		$9,842,000		$9,842,000
   Variable expenses		3,589,000		5,180,000
   Contribution margin		$6,253,000		$4,662,000
   Less total fixed expenses		3,515,795		1,439,590
   Operating income		$2,737,205		$3,222,410
   Unit selling price		$266		$266
   Unit variable cost		$97		$140
   Unit contribution margin		$169		$126

   Required:

   1. Compute the degree of operating leverage for each process. Round your answers to one decimal place. Use the rounded answers in subsequent calculations.

   Process 1
   Process 2

   2. Suppose that sales are 20 percent higher than budgeted. By what percentage will operating income increase for each process?

   Process 1		%
   Process 2		%

   What will be the increase in operating income for each system? Round your answers to the nearest dollar.

   Process 1	$
   Process 2	$

   What will be the total operating income for each process? Round your intermediate calculations and final answers to the nearest dollar. Use the rounded answers in subsequent calculations.

   Process 1	$
   Process 2	$

   3. What if unit sales are 10 percent lower than budgeted? By what percentage will operating income decrease for each process?

   Process 1		%
   Process 2		%

   What will be the total operating income for each process? Round your answers to the nearest dollar.

   Process 1	$
   Process 2	$

Answer 1

Required 1 Degree of operating leverage DOL= contribution Margin Operating Income process DOL = $ 6253000 $2737205 process 2 DOL = $ 466 2000 = 1.4 $ 3222410

Required. 2 % change in Operating Income - Degree of x Operating leverage 7 change in sales = 2.3 x 206 =46./. process 1 % change in operating Income process 2 % change in Operating Income = 1.4%20% = 28% Increases in operating Current , Income % change Operating y Income in Operating Income process 1 = $2737205 X 46% = $ 1259114 process 2 = $ 3222410 X 28-1. = $902275

Total operating = Income Current lit% increase in Operating ne operatings Income Income process 1 = $ 2737205 x (1746-.) = $ 3996319 process 2 : $ 3222410 X (17 28.7.) = $4124685

Required. 3 % change in operating Income = Degree of operating X % change in leverage Sales process 1 = 2:3 x 10-. = 23.1. process 2 - HHX 10% = 14.7. Total operating - Income Current 1 operating 8 Income -7. decrease in ? operating Income process 1 = $ 2737205 x (1 - 2311) = $ 2107648 process 2= $32224108 (1-144) = $2771213