   Chapter 7, Problem 23BEA ### Managerial Accounting: The Corners...

7th Edition
Maryanne M. Mowen + 2 others
ISBN: 9781337115773

#### Solutions

Chapter
Section ### Managerial Accounting: The Corners...

7th Edition
Maryanne M. Mowen + 2 others
ISBN: 9781337115773
Textbook Problem
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# Impact of Increased Sales on Operating Income Using the Degree of Operating LeverageHead-First Company had planned to sell 5,000 bicycle helmets at $75 each in the coming year. Unit variable cost is$45 (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$100,500. 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.

1.

To determine

Compute the percent change in expected operating income.

Explanation

Operating Income:

The amount of earnings before charging any interest and tax is known as operating income. It is calculated by deducting the amount of expense by the sales revenue.

Use the following formula to calculate the percentage change in operating income:

Percentage change in operating income=(Degree of operating leverage×Percentage change in sales)

Substitute 1

2.

To determine

Compute the expected operating income for the next year.

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