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Q35E

Expert-verified
Horngren'S Financial And Managerial Accounting
Found in: Page 1129

Short Answer

Following is the income statement for Marrow Mufflers for the month of June 2018:

MARROW MUFFLERS

Contribution Margin Income Statement

Month Ended June 30, 2018

Net Sales Revenue (140 units _ $250) $ 35,000

Variable Costs (140 units _ $50) 7,000

Contribution Margin 28,000

Fixed Costs 11,500

Operating Income $ 16,500

Requirements

1. Calculate the degree of operating leverage. (Round to four decimal places.)

2. Use the degree of operating leverage calculated in Requirement 1 to estimate the change in operating income if total sales increase by 40% (assuming no change in sales price per unit). (Round interim calculations to four decimal places and final answer to the nearest dollar.)

3. Verify your answer in Requirement 2 by preparing a contribution margin income statement with the total sales increase of 40%.

  1. Degree of operating leverage equals 1.6970
  2. Percentage change in operating income equals 68%.
  3. Operating income equals $27,700, which represents increase of 68% in operating income.
See the step by step solution

Step by Step Solution

Step 1: Calculation of operating leverage 

Step 2: Calculation of estimated change in operating income

Step 3: Contribution margin income statement

Revised unit sold (140 x (1+40%)

196 units

Estimated sales (196 x $250)

$49,000

Variable cost ($196 x $50)

$9,800

Contribution margin

$39,200

Fixed costs

$11,500

Operating income

$27,700

Change in operating income percentage

($27,700-$16,500) / $16,500)

67.88% or 68%

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