Question

sells authentic Amish quilts on her website. Suppose Sally expects to sell 1 comma 800 quilts during the coming year. Her average sales price per quilt is $ 350​, and her average cost per quilt is $ 150. Her fixed expenses total $ 135 comma 000. Compute Sally​'s operating leverage factor at an expected sales level of 1 comma 800 quilts. If sales volume increases 15​%, by what percentage will her operating income​ change? Prove your answer by calculating operating income at a sales volume of 1 comma 800 and at a sales volume of 2 comma 070.

Answer 1

It will increase by 37.5%

Step-by-step explanation:

we solve for the variable cost first:

135,000 fixed cost / 1,800 units = 75

average cost 150

less unit fixed cost of 75

variable cost 75

contribution: (350 - 75)/ 350 = 0,7857

Now we construct the operating income at the given sales level

sales revenue 1,800 x 350 = 630,000

variable cost 1,800 x 75 = (135,000)

contribution 495,000

fixed cost 135,000

operating income 360,000

increase of 15% in sales 1,800 x 1.15 = 2,070

sales revenue 2,070 x 350 = 724,500

variable cost 2.070 x 75 = (155,250)

contribution 569,250

fixed cost (135,000)

operating income 434,250

Now, we solve for the operating leverage

495,000 / 360,000 = 1.375

360,000 x (1 + 1.375 x 0.15) = 434,250

Answer 2

1) Operating Leverage Factor = Contribution margin / net income

= $360,000 / $225,000

= 1.6

2 ) % change in Net income = 1.6 *15%

=24%

PROOF

Income Statement 1,800 units 2,070 units

Sales $630,000 $724,500

Variable cost -$270,000 -$310,500

Contribution $360,000 $414,000

Fixed Cost -$135,000 -$135,000

Net Income $225,000 $279,000

change = 279,000 - 225,000 = $54,000

% Change = $54,000 / $225,000

= 0.24 *100 = 24%

Step-by-step explanation:

1) Income Statement

Sales (1,800 *$350) $630,000

Variable Cost (1,800*$150) -$270,000

Contribution $360,000

Fixed Cost -$135,000

Net Income $225,000