Question

The following information applies to the questions displayed below.] Oslo Company prepared the following contribution format income statement based on a sales volume of 1,000 units (the relevant range of production is 500 units to 1,500 units): $21,500 Sales Variable expenses 12,500 9,000 7,200 Contribution margin Fixed expenses 1,800 Net operating income 3. value: 5.00 points 12. What is the degree of operating leverage? (Round your answer to 2 decimal places.) Degree of operating leverage

Answer 1

(1)

degree of operating leverage = contribution margin/net operating income

= $9000/$1800

= 5

(2)

If the degree of operating leverage is 5, then a 3% increase in sales would translate into a

5 x 3% = 15% increase in net operating income.

(3)

margin of safety in dollars = total sales - break even sales

= 21500 - $17200

= $4300

where,

contribution margin ratio = $9000/$21500 = 41.86%

break even sales = $7200/41.86% = $17200

(4)

Margin of safety percentage = $4300/$21500

= 20%