Question

WESTERWHEAT Contribution Margin Income Statement 150,000 units sold Total Per Unit Percent Sales revenue $1,950,000 $13.00 1008 Less: Variable 1,200,000 8.00 620 costs Contribution $ 750,000 $ 5.00 388 Less: Fixed costs 350,000 Net operating $ 400,000 income Knowledge Check 01 What is Westerwheat's degree of operating leverage? 2143 4.875 1.875 3.000 Knowledge Check O2 A 20 percent increase in sales revenue will increase net operating Income by 42.86% 97.50% 60.00% 37.50% Knowledge Check 03 Decreasing fixed costs by $100,000 will Decrease the degree of operating leverage by 0.375 Increase the degree of operating leverage by 0.857 Decrease the degree of operating leverage by 0.975 Decrease the degree of operating leverage by 0.600

Answer 1

01)

Degree of operating leverage = Contribution margin / Net operating income

= $750,000 / $400,000

= 1.875

3rd option

02)

Increase in net operating income = Degree of operating leverage X % change in sales

= 1.875 X 20

= 37.50%

4th option

03)

Net operating income = Contribution margin - (Fixed cost - $100,000)

= $750,000 - ($350,000 - $100,000)

= $500,000

Degree of operating leverage = Contribution margin / Net operating income

= $750,000 / $500,000

= 1.5

Previous degree of operating leverage = 1.875

Decrease in operating leverage = 1.875 - 1.5 = 0.375

1st option