Question

Requieu [The following information applies to the questions displayed below.) 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 Variable expenses Contribution margin Fixed expenses Net operating income $ 20,000 12,000 8,000 6,000 $ 2,000 14. Assume that the amounts of the company's total variable expenses and total fixed expenses were reversed. In other words, assume that the total variable expenses are $6,000 and the total fixed expenses are $12,000. Under this scenario and assuming that total sales remain the same, what is the degree of operating leverage? Degree of operating leverage

Answer 1

14.

Degree of operating leverage = Contribution margin / Operating income

Degree of operating leverage = $20,000-6,000 / 20,000-6,000-12,000

Degree of operating leverage = $14,000 / 2,000 = 7

15.

Degree of operating leverage = % Change in operating income / % Change in Sales

7 = % Change in operating income / 5%

Increase in net operating income = 7*5% = 35%