Question

sells authentic Amish quilts on her website. Suppose expects to sell quilts during the coming year. Her average sales price per quilt is ​, and her average cost per quilt is . Her fixed expenses total . Compute ​'s operating leverage factor at an expected sales level of quilts. If sales volume increases ​%, by what percentage will her operating income​ change? Prove your answer by calculating operating income at a sales volume of and at a sales volume of .

Answer 1

1. Operating leverage = Contribution margin / Operating income

Contribution margin = (Selling price - average cost) * no. of units sold

= (375 - 175 ) * 2,000 quilts

= $400,000

Operating income = Contribution margin - Fixed expenses

= 400,000 - 200,000

= $200,000

Operating leverage = 400,000/ 200,000

= 2

2. Sales increases by 20%:

Operating income = 20% * 2

= 40%

3. At sales volume of 2,000 quilts, operating income was $200,000

Sales volume of 2,400 quilts:

Operating income = (375 - 175 ) * 2,400 quilts - 200,000

= 480,000 - 200,000

= $280,000

Percentage increase:

= (New income - old income) / old income

= (280,000 - 200,000) / 200,000

= 40%