Angie Silva has recently opened The Sandal Shop in Brisbane, Australia, a store that specializes in fashionable sandals. In time, she hopes to open a chain of sandal shops. As a first step, she has gathered the following data for her new store: Sales price per pair of sandals $34
Variable expenses per pair of sandals 17
Contribution margin per pair of sandals $17
Fixed expenses per year:
Building rental $12,800
Equipment depreciation 12,800
Selling 10,200
Administrative 15,200
Total fixed expenses $51,000
During the first year, the store sold only 4,000 pairs of sandals and reported the following operating results:
Sales (4,000 pairs) $136,000
Variable expenses 68,000
Contribution margin 68,000
Fixed expenses 51,000
Net operating income $17,000
a. What is the store's degree of operating leverage?
b. Angie is confident that with a more intense sales effort and with a more creative advertising program she can increase sales by 50% next year. Using the degree of operating leverage, what would be the expected percentage increase in net operating income if Angie is able to increase sales by 50%?