Compute the company\'s operating leverage. Amount % of Sales sales..............

Question

Compute the company's operating leverage.

                             Amount             % of Sales

sales........................$120,000             100%

Variable expenses...$ 84,000               70%

Contribution margin..$36,000               30%

Fixed expenses.........$24,000

Net Operating Income$12,000

1. Compute the degree of operating leverage

2. Using the degree of operating leverage estimate the impact on net operating income of a 10% increase in sales.

Construct a new contribution format income statement assuming a 10% increase in sales.

Explanation / Answer

1) degree of ol = CONTRI/EBIT

= 36000/12000

=3

2) 10% INCREASE IN SALES

SALES = 132000

VAR EXP = 92400

CONRTI = 39600

FIXED EXP=24000

NET OPERATING INCOME = 15600

DEGREE OF OL = % CHANGE IN EBIT/% CHANGE IN SALES

3 = % CHANGE IN EBIT/10

% CHANGE IN EBIT= 30%

(3600/12000)*100 = 30%

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