1. The following worksheet contains cost and revenue data for koyel Shoe Company:
Total 15,000 Pairs of Shoes
Per pair of Shoes
Sales Revenue
Tk. 600,000
Tk. 40
Variable expenses:
Invoice cost
202,500
Tk. 13.5
Sales commission
67,500
4.5
Total variable expenses
Tk. 270,000
Tk.18
Contribution margin
Tk. 330,000
Tk. 22
Fixed expenses:
Advertising
Tk. 30,000
Rent
20,000
Salaries
100,000
Total fixed expenses
Tk. 150,000
Net Income
Tk. 180,000
Required:
(a) Compute the company’s degree of operating leverage at the present level of sales.
(b) Assume that through a more intense effort by the sales staff, the company’s sales increase
by 8% next year. By what percentage would you expect net operating income to increase? Use the degree of operating leverage to obtain your answer.
(c) Verify your answer to (b) by preparing a new contribution format income statement showing an 8% increase in sales.
Question (a). Compute the company’s degree of operating leverage at the present level of sales.
Solution (a)
To compute the company’s degree of operating leverage at the present level of sales, we use the formula
Degree\,of\,Operating\,Leverage = \frac{{Contribution\,M\arg in}}{{Net\,Income}}\
Degree\,of\,Operating\,Leverage = \frac{{Tk 330,000}}{{Tk 180,000}}\
Question (b). Assume that through a more intense effort by the sales staff, the company’s sales increase by 8% next year. By what percentage would you expect net operating income to increase? Use the degree of operating leverage to obtain your answer.
Solution (b)
Operating\,Income\,Increase = Operating\,Leverage \times 8\% \
Operating\,Income\,Increase = 1.83333..... \times 8\% \
Operating\,Income\,Increase =14.66666....\% \
Question (c). Verify your answer to (b) by preparing a new contribution format income statement showing an 8% increase in sales.
Solution (c)
Sales Revenue
The variable expenses are
Invoice Cost
Sales Commission
Hence, total variable expenses are
Contribution margin
Now Fixed Expenses are
Advertising
Rent
Salaries
Total Fix Expenses
Net Income
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