: By what percentage will profits increase with this change in sales volume? What is the theory behind the operating leverage concept?
: By what percentage will profits increase with this change in sales volume? What is the theory behind the operating leverage concept?
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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100%
Carlyle Lighting Products produces two different types of lamps: a floor lamp and a desk lamp.
Floor lamps sell for $30 and desk lamps sell for $20.
The projected income statement for the upcoming year follows:
Sales $600,000
Less: Variable costs 400,000
Contribution margin 200,000
Less: Fixed costs 150,000
Operating income $50,000
The owner of Carlyle’s estimates that 60 percent of the sales revenues will be produced by floor lamps and the remaining 40 percent by desk lamps.
Floor lamps are also responsible for 60 percent of the variable expenses. Of the fixed expenses, one-third are common to both products, and one-half are directly traceable to the floor lamp product line.
Required: By what percentage will profits increase with this change in sales volume? What is the theory behind the operating leverage concept?
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