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Oslo Company prepared the following contribution format income statement based on a sales volume of 1,000 units (the relevant range of production is 500 units to 1,500 units): Sales$22,700Variable expenses 12,900Contribution margin 9,800Fixed expenses 8,232Net operating income$1,568 Required: Using the degree of operating leverage, what is the estimated percent increase in net operating income of a 5% increase in sales? (Do not round intermediate calculations
Oslo Company prepared the following contribution format income statement based on a sales volume of 1,000 units (the relevant range of production is 500 units to 1,500 units):
Sales$22,700Variable expenses 12,900Contribution margin 9,800Fixed expenses 8,232Net operating income$1,568
Required:
Using the degree of operating leverage, what is the estimated percent increase in net operating income of a 5% increase in sales? (Do not round intermediate calculations. Round your answer to 2 decimal places.)
Expert Solution
Degree of Operating Leverage (DOL) = Contribution Margin / Operating Income
= $9800 / $1568
= 6.25
Therefore,
Change in Operating Income / Change in Sales = 6.25
If there is a 5% increase in sales,
Change in net operating income = 6.25 * Change in Sales = 6.25 * 5% = 6.25 * .05 = 0.3125 = 31.25 %
So if there is an increase of 5% in sales the net operating income will be increased by 31.25%.
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