Question

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. $___

Answer 1

The percent change in operating income expected with a 10% increase in sales is 15%, and the new operating income expected next year after this percent change is $115,575.

Step-by-step explanation:

The question relates to the concept of operating leverage in a business scenario. To calculate the percent change in operating income when sales volume increases by 10%, we can use the degree of operating leverage (DOL). The formula for the percent change in operating income is the degree of operating leverage multiplied by the percent change in sales: 1.5 times 10%, which equals 15%. Thus, the percent change in operating income expected is 15%.

To determine the new operating income for next year, we take the current operating income and increase it by 15%. The current operating income is $100,500, so the expected operating income next year after a 15% increase would be calculated as follows: $100,500 + (15% of $100,500). Therefore, the new operating income would be $115,575.

Answer 2

Instructions are listed below.

Step-by-step explanation:

Giving the following information:

Sales= 5,000 units

Selling price= $75

The unit variable cost= $45

Total fixed cost equals= $49,500

Operating income at 5,000 units sold is $100,500.

Degree of operating leverage= 1.5

Now Head-First expects to increase sales by 10% next year.

1) % Change on income= ?

We know that the degree of operating leverage is calculated by the following formula:

degree of operating leverage= %change in income/ %change in sales

1.5= %change in income/0.10

0.15= %change in income

15%= %change in income

2) Net operating income

Sales= 5,500*75= 412,500

Total variable cost= 5,500*45= (247,500)

Contribution margin= 165,000

Fixed costs= (49,500)

Net operating income= 115,500

Change in income= (115,500 - 100,500)/100,500= 0.1493= 14.93%