Question

. Singh Co. reports a contribution margin of $717,000 and fixed costs of $478,000. (1) Compute the company’s degree of operating leverage. (2) If sales increase by 20%, what amount of income will Singh Co. expect?

Answer 1

Answer:

1. 3

2. $382,400

Explanation:

The computation is shown below:

The computation of the degree of operating leverage is shown below:

= (Contribution margin) ÷ (Contribution margin - Fixed costs)

= ($717,000) ÷ ($717,000 - $478,000)

= $717,000 ÷ $239,000

= 3

Now the increase in percentage of income

= 20% × 3

= 60%

So, the expected of income is

= $239,000 × 100 + 60%

= $239,000 × 160%

= $382,400