Impact of Increased Sales on Operating Income Using the Degree of Operating Leverage Head-First Company had planned to sell 5,000 bicycle helmets at $70 each in the coming year. Unit variable cost is $42 (includes direct materials, direct labor, variable factory overhead, and variable selling expense). Total fixed cost equals $49,500 (includes fixed factory overhead and fixed selling and administrative expense). Operating income at 5,000 units sold is $90,500. The degree of operating leverage is 1.5. Now Head-First expects to increase sales by 10% next year. Required: 1.  Calculate the percent change in operating income expected. 2.  Calculate the operating income expected next year using the percent change in operating income calculated in Requirement 1.

Managerial Accounting: The Cornerstone of Business Decision-Making
7th Edition
ISBN:9781337115773
Author:Maryanne M. Mowen, Don R. Hansen, Dan L. Heitger
Publisher:Maryanne M. Mowen, Don R. Hansen, Dan L. Heitger
Chapter7: Cost-volume-profit Analysis
Section: Chapter Questions
Problem 16BEA
icon
Related questions
Question
  1. Impact of Increased Sales on Operating Income Using the Degree of Operating Leverage

    Head-First Company had planned to sell 5,000 bicycle helmets at $70 each in the coming year. Unit variable cost is $42 (includes direct materials, direct labor, variable factory overhead, and variable selling expense). Total fixed cost equals $49,500 (includes fixed factory overhead and fixed selling and administrative expense). Operating income at 5,000 units sold is $90,500. The degree of operating leverage is 1.5. Now Head-First expects to increase sales by 10% next year.

    Required:

    1.  Calculate the percent change in operating income expected.

    2.  Calculate the operating income expected next year using the percent change in operating income calculated in Requirement 1.

Expert Solution
Step 1

Degree of Operating leverage measure that how much operating Income will change as a result of change in sales.

trending now

Trending now

This is a popular solution!

steps

Step by step

Solved in 3 steps

Blurred answer
Knowledge Booster
Performance measurements
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, accounting and related others by exploring similar questions and additional content below.
Similar questions
Recommended textbooks for you
Managerial Accounting: The Cornerstone of Busines…
Managerial Accounting: The Cornerstone of Busines…
Accounting
ISBN:
9781337115773
Author:
Maryanne M. Mowen, Don R. Hansen, Dan L. Heitger
Publisher:
Cengage Learning
Managerial Accounting
Managerial Accounting
Accounting
ISBN:
9781337912020
Author:
Carl Warren, Ph.d. Cma William B. Tayler
Publisher:
South-Western College Pub
Cornerstones of Cost Management (Cornerstones Ser…
Cornerstones of Cost Management (Cornerstones Ser…
Accounting
ISBN:
9781305970663
Author:
Don R. Hansen, Maryanne M. Mowen
Publisher:
Cengage Learning