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# Operating leverage and operating income

Please complete the attachment.

Exercise 6-8
Per Unit Total
Sales 100% \$120,000
Variable Costs 70% 84,000
Contribution margin 30% 36,000
Fixed expense 24,000
Net operating income \$12,000

This time we are using the contribution margin percentage, rather than per unit.

Req. 1--Show your computation of the degree of operating leverage here:

Req 2--Show your computation of the operating income with a 10% increase in sales.

Req 3--Use this contribution margin income statement. Change the sales and verify your
operating income that you computed in req. 2.

Per Unit Total
Sales 100% \$120,000
Variable Costs 70% 84,000
Contribution margin 30% 36,000
Fixed expense 24,000
Net operating income \$12,000

Exercise 6-11
Show your computations of operating income and then adjust the contribution
margin income statement on the right to verify your answer, as was shown in class.

This is the original contribution margin income statement. You will be adjusting
this statement for each condition, #1-#4

Per Unit Total
Sales 5 \$150,000
Variable Costs 3 90,000
Contribution margin 2 60,000
Fixed expense 50,000
Net operating income \$10,000

No. of units 30,000

Condition #1--number of units sold increases by 15%

Show computations: Per Unit Total
Sales 5 \$150,000
Variable Costs 3 90,000
Contribution margin 2 60,000
Fixed expense 50,000
Net operating income \$10,000

No. of units 30,000

Condition #2--The selling price decreases by 50 cents per unit, and the number o units sold
increases by 20%

Show computations: Per Unit Total
Sales 5 \$150,000
Variable Costs 3 90,000
Contribution margin 2 60,000
Fixed expense 50,000
Net operating income \$10,000

No. of units 30,000

Condition #3--The selling price increases by 50 cents per unit, fixed expenses increase by
\$10,000 and the number of units sold decreases by 5%.

Show computations: Per Unit Total
Sales 5 \$150,000
Variable Costs 3 90,000
Contribution margin 2 60,000
Fixed expense 50,000
Net operating income \$10,000

No. of units 30,000

Condition #4--Variable expenses increase by 20 cents per unit, the selling price
increases by 12% and the number of units sold decreases by 10%.

Show computations: Per Unit Total
Sales 5 \$150,000
Variable Costs 3 90,000
Contribution margin 2 60,000
Fixed expense 50,000
Net operating income \$10,000

No. of units 30,000

#### Solution Summary

The solution explains how to calculate the impact on operating income of operating leverage

\$2.19