Question

Following is the income statement for Manning Mufflers for the month of June 2018: (Click the icon to view the contribution margin income statement.) Read the requirements. Requirement 1. Calculate the degree of operating leverage. (Round to four decimal places.) Select the labels and enter the amounts to calculate the degree of operating leverage for Manning Mufflers. Degree of operating leverage = Requirement 2. Use the degree of operating leverage calculated in Requirement 1 to estimate the change in operating income if total sales increase by 30% (assuming no change in sales price per unit). (Round interim calculations to four decimal places and final answer to the nearest dollar.) The estimated change in operating income will be $ Requirement 3. Verify your answer in Requirement 2 by preparing a contribution margin income statement with the total sales increase of 30%. Manning Mufflers Contribution Margin Income Statement Month Ended June 30, 2018 Net Sales Revenue Variable Costs

Answer 1

1.

Contribution margin	/	Operating income	=	Degree of operating leverage
52,000	/	42,500	=	1.2235

2. Estimated change in net operating income

= increase in sales * degree of operating leverage = 30% * 1.2235

= 36.705%*42,500

= 15,600

3.

Net sales (78,000+30%)	101,400
Variable cost (26,000+30%)	33,800
Contribution margin	67,600
Fixed cost	9,500
Operating income	58,100