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 $72 each in the coming year. Unit variable cost is $53 (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 $45,500. The degree of operating leverage is 2.1. Now Head-First expects to increase sales by 10% next year. Required: 1. Calculate the percent change in operating income expected. 21 % 2. Calculate the operating income expected next year using the percent change in operating income calculated in Requirement 1.

Answer 1

2.

Net operating income = $45,500

Increase in net operating income = 21%

Operating income next year = $45,500 + 21% = $55,055