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

Using the degree of operating leverage, what is the estimated percent increase in net operating income of a 5% increase in sales?

Answer 1

The degree of operating leverage (DOL) is a measure of how sensitive net operating income (NOI) is to changes in sales. To estimate the percent increase in NOI for a 5% increase in sales, we multiply the DOL by the percentage increase in sales.

Step-by-step explanation:

The degree of operating leverage (DOL) is a measure of how sensitive net operating income (NOI) is to changes in sales. It is calculated by dividing the contribution margin (CM) by NOI. In this case, the CM is $28,000 and the NOI is $6,160. So, the DOL is $28,000/$6,160 = 4.55.

To estimate the percent increase in NOI for a 5% increase in sales, we multiply the DOL by the percentage increase in sales. In this case, the percentage increase in sales is 5%. Hence, the estimated percent increase in NOI is 4.55 x 5% = 22.75%.