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Survey of Accounting (Accounting I)

8th Edition
Carl Warren
ISBN: 9781305961883

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Survey of Accounting (Accounting I)

8th Edition
Carl Warren
ISBN: 9781305961883
Textbook Problem

Contribution margin, break-even sales, cost-volume-profit graph, and operating leverage
Organic Health Care Products Inc. expects to maintain the same inventories at the end of 20Y8 as at the beginning of the year. The total of all production costs for the year is therefore assumed to be equal to the cost of goods sold. With this in mind, the various department heads were asked to submit estimates of the costs for their departments during 20Y8. A summary report of these estimates is as follows:

It is expected that 400.000 units will be sold at a price of $25 a unit. Maximum sales within the relevant range are 500.000 units.

Instructions

Determine the operating leverage.

To determine

Concept Introduction:

Degree of operating leverage:

The Degree of operating leverage shows the relation between change in net operating income and change in sales. The formulas for degree of operating leverage are as follows:

  Degree of operating leverage =  Contribution MarginOperating income 

  Change in operating income = Changes in sales ×Degree of operating leverage

To Calculate:

The Degree of operating leverage

Explanation

The Degree of operating leverage is calculated as follows:

    Sales Revenue (A) (400000 units @ $25) $ 10,000,000
    Total Variable Costs (B) (400000 units @ $15) $ 6,000,000
    Total Contribution Margi...

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