Question

Angie Silva has recently opened The Sandal Shop in Brisbane, Australia, a store that specializes in fashionable sandals. In time, she hopes to open a chain of sandal shops. As a first step, she has gathered the following data for her new store: Sales price per pair of sandals Variable expenses per pair of sandals 26 12 Contribution margin per pair of sandals Fixed expenses per year: Building rental Equipment depreciation Selling Administrative 3,200 4,000 2,400 6,400 Total fixed expenses 16,000 5. Refer to the original data. During the first year, the store sold only 2,500 pairs of sandals and reported the following operating results Sales (2,500 pairs) Variable expenses Contribution margin Fixed expenses 50,000 30,000 20,000 16,000 $ 4,000 Net operating income a. What is the store's degree of operating leverage? b. Angie is confident that with a more intense sales effort and with a more creative advertising program she can increase sales by 50% next year. Using the degree of operating leverage, what would be the expected percentage increase in net operating income if Angie is able to increase sales by 50%?

Answer 1

a.	Degree of Operating Leverage	5
b.	Expected Percentage Increase in Net Operating Income	250	%

Degree of Operating Leverage = Contribution Margin / Operating Income = $ 20,000 / $ 4,000 = 5 times

If sales increase by 50 %, net operating income increase = 2,500 units x 50 % x $ 8 = $ 10,000.

Percentage increase in net operating income = $ 10,000 / 4,000 * 100 = 250 %.