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 $ 80,000 Variable expenses 52,000 Contribution margin 28,000 Fixed expenses 21,840 Net operating income $ 6,160 Foundational 5-13 13. Using the degree of operating leverage, what is the estimated percent increase in net operating income of a 5% increase in sales?

Explanation:

Given that the relevant range of production is 500 units to 1,500 units, the cost elements are fixed and variable. All the items listed will change as a result of  a 5% increase in sales, only the fixed expense will not be affected when the activity level changes from 1000 units to 1050 units.

The 1050 units represents the units sold where there is a 5% increase.

= 1000 × 1.05 = 1050 units

As such,

Sales (1050 units) = 1050/1000 × $80,000 = $84,000

Variable expenses (1050 units)  = 1050/1000 × $52,000 = $54,600

As such, If the company sells 1050 units

                                     Amount in $

Sales                                 84,000

Variable expenses           (54,600)

Contribution margin          29,400

Fixed expenses               (21,840)

Net operating income       7,560  

Estimated percent increase in net operating income = (7560 - 6,160)/6,160 × 100%

= 1,400/6160 × 100%

= 22.73%

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