Question

Oslo Co prepared the following Contribution Format income statement based on sales volume of 1,000 units. (the relevant rage of production is 500 to 1500 units):

Sales 80,000
Var C 52,000
CM 28,000
Fixed 21,840
NOI 6,160

Assume that the amounts of the company's total variable expenses and total fixed expenses were reversed. In other words, assume that the total variable expenses are $21,840 and the total fixed expenses are $52,000. Given this scenario and assuming that total sales remain the same. Using the degree of calculated operating leverage, what is the estimated percent increase in net operating income of a 5% increase in sales?

Answer 1

To calculate the estimated percent increase in net operating income, we use the formula for the degree of operating leverage (DOL).

Step-by-step explanation:

To calculate the estimated percent increase in net operating income, we need to use the formula for the degree of operating leverage (DOL). DOL is calculated by dividing the percentage change in net operating income by the percentage change in sales.

First, we need to determine the current net operating income (NOI) based on the sales volume of 1,000 units. From the given information, NOI is $6,160.

Next, we need to calculate the new net operating income (NOI) after a 5% increase in sales. To do this, we can use the percentage change in sales (5%) and multiply it by the current NOI ($6,160).

Finally, we can calculate the estimated percent increase in net operating income by dividing the new NOI by the current NOI, subtracting 1, and multiplying by 100.