Change all of the numbers in the data area of your worksheet so that it looks like this:
Data
4 Unit sales 10,000 units
5 Selling price per unit $20 per unit
6 Variable expenses per unit $8 per unit
7 Fixed expenses $90,000
A) What is the break-even in dollar sales?
B) What is the margin of safety percentage?
C) What is the degree of operating leverage?
1. Using the degree of operating leverage and without changing anything in your worksheet, calculate the percentage change in net operating income if unit sales increase by 20%.
2. Confirm your calculations in Requirement 3 above by increasing the unit sales in your worksheet by 20% so that the Data area looks like this:
Data
4 Unit sales 12,000 units
5 Selling price per unit $20 per unit
6 Variable expenses per unit $8 per unit
7 Fixed expenses $90,000

1. Using the degree of operating leverage and without changing anything in your worksheet, calculate the percentage change in net operating income if unit sales increase by 20%.
2. Confirm your calculations in Requirement 3 above by increasing the unit sales in your worksheet by 20% so that the Data area looks like this:
A. What is net operating income?
B. By what percentage did the net operating income increase?

1. Using the degree of operating leverage and without changing anything in your worksheet, calculate the percentage change in net operating income if unit sales increase by 20%.

if unit sales increase by 20%, then profits should increase by 80%

2. Confirm your calculations in Requirement 3 above by increasing the unit sales in your worksheet by 20%

A. What is net operating income?

(10,000 x 1.2 x $20) - (10,000 x 1.2 x $8) - $90,000 = $240,000 - $96,000 - $90,000 = $54,000

B. By what percentage did the net operating income increase?

net operating income increased from $30,000 to $54,000 (an 80% increase)

Explanation:

selling price $20

variable costs $8

contribution margin $12

break even point = $90,000 / $12 = 7,500 x $20 = $150,000

margin of safety = (current sales - break even) / current sales = $50,000 / $200,000 = 25%

degree of operating leverage = (quantity x contribution margin) / [(quantity x contribution margin) - fixed costs] = (10,000 x $12) / ($120,000 - $90,000) = $120,000 / $30,000 = 4

or contribution margin / net profits = $120,000 / $30,00 = 4