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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 $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.
Compute the percent change in expected operating income.
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:
Substitute 1
2.
Compute the expected operating income for the next year.
Chapter 7 Solutions
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