Question

Mary Smith sells gourmet chocolate chip cookies. The results of her last month of operations are as follows: Sales revenue Cost of goods sold (all variable) Gross margin Selling expenses (20% variable) Administrative expenses (60% variable) Operating income $60,500 26,500 34,000 9,300 $13,700 What is Mary's degree of operating leverage? (Round answer to 2 decimal places, e.g. 52.75.) Operating leverage If Mary can increase sales by 10%, by how much will her operating income increase? (Round answer to o decimal places, e.g. 5,275.) Increase in operating income $ En le ction Onan Show Work

Answer 1

Answer

• Workings

	Total	Variable Portion	Fixed Portion
Cost of Goods Sold	$26,500	$26,500	$0
Selling Expense	$9,300	$1,860	$7,440
Administrative expense	$11,000	$6,600	$4,400
Total	$46,800	$34,960	$11,840

	Total	Variable Portion	Fixed Portion
Cost of Goods Sold	26500	26500	0
Selling Expense	9300	=9300*20%	=9300-1860
Administrative expense	11000	=11000*0.6	=11000-6600

• Requirement 1

A	Sales	$60,500
B	Variable cost	$34,960
C = A - B	Contribution margin	$25,540
D	Fixed expense	$11,840
E = C- D	Operating Income	$13,700
F = C/E	Operating Leverage	1.86 ANSWER

• Requirement 2

--Working

A	Sales	$60,500
B	Variable cost	$34,960
C = A - B	Contribution margin	$25,540

>Increase in Operating Income = Increase in sale x (Contribution margin / Original sale)
= ($60500 x 10% increase) x ($25540/60500)
= 6050 x 25540/60500
= $ 2,554 Answer