Impact of Increased Sales on Operating Income Using the Degree of Operating Leve

Question

Impact of Increased Sales on Operating Income Using the Degree of Operating Leverage Head-First Company had planned to sell 5,000 bicycle helmets at $75 each in the coming year. Unit variable cost is $51 (includes direct materials, direct labor, variable factory overhead, and variable selling expense). Total fixed cost equals $49,500 (includes fixed factory overhead and fixed selling and administrative expense). Operating income at 5,000 units sold is $100,500. The degree of operating leverage is 1.2. Now Head-First expects to increase sales by 10 percent next year. Calculate the percent change in operating income expected. Calculate the operating income expected next year using the percent change in operating income calculated in Requirement 1.

Explanation / Answer

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Operating Leverage = Contribution/Operating Income

= 120,000/70,500

= 1.7

If sales is expected to increase by 10% , percentage change in operating income expected = 10*1.7

= 17%

Expected Operating Income = 70500*1.17

= $82,485

As per the information given in the question

Operating Leverage = Contribution/Operating Income

= 120,000/100500

= 1.19

If sales is expected to increase by 10% , percentage change in operating income expected = 10*1.19

= 11.9%

Expected operating income = 100,500*1.119

= $112,460

Given Sales 375000 Less:-Variable Cost 255000 Contribution 120000 Less:-Fixed Costs 49,500 Opertaing Income 70,500 1,00,500

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