Homework Answers
| Answer to 1st part: Contribution margin decrease; Net income decrease |
| Contribution margin per unit = Selling price per unit - Variable cost per unit |
| If variable cost per unit increases then contribution margin per unit decreases. |
| Thus, Decrease in contribution margin result in decrease in net income as there is direct relationship in between contribution margin and net income. |
| Answer to 2nd part: 12.41 |
| Calculation of Degree of Operating leverage is as folllows: |
| Operating leverage = Contribution margin / Net operating Income |
| = $ 720,000 / $ 58,000 |
| = 12.41 times |
| Thus, Degree pf operating leverage is 12.41 times |
| working note: |
| Contribution margin = Sales - Variable cost |
| = $ 1,560,000 - $ 840,000 |
| = $ 720,000 |
| Variable cost = variable manufacturing expense + variable selling and administrative expense |
| = $ 6,60,000 + $ 180,000 |
| = $ 840,000 |
| Net operating income given in question. |
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