Green Valley Corp.'s contribution format income statement for the most recent month follows: Sales $ 506,000 Variable expenses 236,500 Contribution margin 269,500 Fixed expenses 241,700 Net operating income $ 27,800 Required: a. Compute the degree of operating leverage to two decimal places. b. Using the degree of operating leverage, estimate the percentage change in net operating income that should result from a 3% increase in sales. c. If Green Valley’s competitor Black Mountain Inc. has a degree of operating leverage as 8, which company has the higher operating risk?
Variance Analysis
In layman's terms, variance analysis is an analysis of a difference between planned and actual behavior. Variance analysis is mainly used by the companies to maintain a control over a business. After analyzing differences, companies find the reasons for the variance so that the necessary steps should be taken to correct that variance.
Standard Costing
The standard cost system is the expected cost per unit product manufactured and it helps in estimating the deviations and controlling them as well as fixing the selling price of the product. For example, it helps to plan the cost for the coming year on the various expenses.
Green Valley Corp.'s contribution format income statement for the most recent month follows:
|
Sales |
$ |
506,000 |
|
Variable expenses |
|
236,500 |
|
Contribution margin |
|
269,500 |
|
Fixed expenses |
|
241,700 |
|
Net operating income |
$ |
27,800 |
Required:
a. Compute the degree of operating leverage to two decimal places.
b. Using the degree of operating leverage, estimate the percentage change in net operating income that should result from a 3% increase in sales.
c. If Green Valley’s competitor Black Mountain Inc. has a degree of operating leverage as 8, which company has the higher operating risk?
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