
1.
Introduction:
Degree of operating leverage: When we observe any business transactions, we observe that the operating income of the company is fluctuating according to the changes in the sales. The measurement of this sort of fluctuation can be termed as the degree of operating leverage.
To evaluate: The degree of operating leverage if the fixed expenses is $270000.
1.

Answer to Problem 1AE
We have derived the degree of operating leverage as 10 and the margin of safety percentage is 10%. When compared to our previous calculation the margin of safety was 20%. We can experience the rise in break-even point with a decrease in the margin of safety.
Explanation of Solution
To calculate the degree of operating leverage when fixed expenses is $270000, firstly we have to calculate the degree of operating leverage when the fixed expense is $240000. We are given this task to educate ourselves and know the importance of Excel application. By doing this, we arrive at some formulas, which will simplify the job of calculation. The only effort from our side is to change the respective figures in the respective cells. However, let us just brief ourselves about the list of formulas useful in the following calculation.
Let us now calculate the degree of operating leverage when the fixed expenses are $240000.
Given information:
Unit Sale 2000 units
Selling price 60 per unit
Variable expenses 45 per unit
Fixed expenses 240000
The degree of operating leverage using Excel application:
$Amount using Excel formulas | |
Selling price per unit | 60 |
Variable expenses per unit | 45 |
Contribution margin per unit | 15 |
CM ratio | 0.25 or 25% |
Variable expense ratio | 0.75 or 75% |
Break-even analysis: | |
Break-even in unit sales | 16000 |
Break-even in dollar sales | 960000 |
Margin of safety: | |
Margin of safety in dollars | 240000 |
Margin of safety in percentage | 0.2 or 20% |
Degree of operating leverage: | |
Sales | 1200000 |
Variable expenses | 900000 |
Contribution margin | 300000 |
Fixed expenses | 240000 |
Net operating income | 60000 |
Degree of operating leverage | 5 |
Having all the other information the same, to change the value in the cell against Fixed expenses as $270000. Excel application is so worthy that it does the job easily once we specify the required formulas.
Similarly, by using the above- mentioned formulas, to calculate the degree of operating leverage when the fixed expenses are $270000.
$Amount using Excel formulas | |
Selling price per unit | 60 |
Variable expenses per unit | 45 |
Contribution margin per unit | 15 |
CM ratio | 0.25 or 25% |
Variable expense ratio | 0.75 or 75% |
Break-even analysis: | |
Break-even in unit sales | 18000 |
Break-even in dollar sales | 1080000 |
Margin of safety: | |
Margin of safety in dollars | 120000 |
Margin of safety in percentage | 0.1 or 10% |
Degree of operating leverage: | |
Sales | 1200000 |
Variable expenses | 900000 |
Contribution margin | 300000 |
Fixed expenses | 270000 |
Net operating income | 30000 |
Degree of operating leverage | 10 |
Finally, to derive the degree of operating leverage which is 10 and the margin of safety percentage is 10%. To compare the previous calculation the margin of safety was 20%. Experience the rise in break-even point with a decrease in the margin of safety.
2.
Introduction:
Degree of operating leverage: When we observe any business transactions, we observe that the operating income of the company is fluctuating according to the changes in the sales. The measurement of this sort of fluctuation can be termed as degree of operating leverage.
Requirement 2
The degree of operating leverage and margin of safety in percentage using Excel.
2.

Answer to Problem 1AE
The degree of operating leverage is 8 and the margin of safety is 13%.
Explanation of Solution
Given information:
Unit Sale 2000 units
Selling price 60 per unit
Variable expenses 45 per unit
Fixed expenses 240000
Let us now calculate the degree of operating income using Excel application. Since we are advised to use the Excel application, only the values are depicted in the calculation shown below.
$ Amount using Excel formula | |
Selling price per unit | 120 |
Variable expenses per unit | 72 |
Contribution margin per unit | 48 |
CM ratio | 0.4 or 40% |
Variable expense ratio | 0.6 or 60% |
Break-even analysis: | |
Break-even in unit sales | 8750 |
Break-even in dollar sales | 1050000 |
Margin of safety: | |
Margin of safety in dollars | 150000 |
Margin of safety in percentage | 0.125 or 13% approx.. |
Degree of operating leverage: | |
Sales | 1200000 |
Variable expenses | 720000 |
Contribution margin | 480000 |
Fixed expenses | 420000 |
Net operating income | 60000 |
Degree of operating leverage | 8 |
Hence, we can conclude that the degree of operating leverage is 8 and the margin of safety is 13%.
3.
Introduction:
Degree of operating leverage: When we observe any business transactions, we observe that the operating income of the company is fluctuating according to the changes in the sales. The measurement of this sort of fluctuation can be termed as the degree of operating leverage.
Requirement 3
The percentage change in net operating income if sales is increased by 15%.
3.

Answer to Problem 1AE
The percentage change in net operating income when there is an increase in sales by 15% is 120%.
Explanation of Solution
Given information:
Unit Sale 2000 units
Selling price 60 per unit
Variable expenses 45 per unit
Fixed expenses 240000
We are asked to calculate the net operating income if there is a percentage increase of 15% in unit sales.
Now, we have to calculate the percentage of change in net operating income.
Percentage change in net operating income can be known by multiplying the degree of operating leverage with the given percentage change in sales.
Therefore, the percentage change in net operating income when there is an increase in sales by 15% is 120%.
4.
Introduction:
Degree of operating leverage: When we observe any business transactions, we observe that the operating income of the company is fluctuating according to the changes in the sales. The measurement of this sort of fluctuation can be termed as the degree of operating leverage.
Requirement 4
The net operating income of the company with the increased sales figures.
4.

Answer to Problem 1AE
The degree of operating leverage is 4.18.
Explanation of Solution
Calculation of sales after increase of percentage:
Sales= 10000 units
So, the sales of
From the above calculation in (2), we are aware that the net operating income is $60000. So, using this information we will calculate the increase of 120%. The end result will be $132000. The same thing is depicted in the calculation given below:
$ Amount using Excel formula | |
Selling price per unit | 120 |
Variable expenses per unit | 72 |
Contribution margin per unit | 48 |
CM ratio | 0.4 or 40% |
Variable expense ratio | 0.6 or 60% |
Break-even analysis: | |
Break-even in unit sales | 8750 |
Break-even in dollar sales | 1050000 |
Margin of safety: | |
Margin of safety in dollars | 330000 |
Margin of safety in percentage | 0.24 or 24% |
Degree of operating leverage: | |
Sales | 1380000 |
Variable expenses | 828000 |
Contribution margin | 552000 |
Fixed expenses | 420000 |
Net operating income | 132000 |
Degree of operating leverage | 4.18 |
Therefore, the degree of operating leverage is 4.18.
5.
Introduction:
Degree of operating leverage: When we observe any business transactions, we observe that the operating income of the company is fluctuating according to the changes in the sales. The measurement of this sort of fluctuation can be termed as the degree of operating leverage.
Requirement 5a
The break-even of unit sales, margin of safety in dollars and degree of operating leverage.
5.

Answer to Problem 1AE
The break-even unit sales are 480 units; margin of safety in dollars is $1200000; and degree of operating leverage is 5.
Explanation of Solution
Given information:
Unit Sale 2000 units
Selling price 60 per unit
Variable expenses 45 per unit
Fixed expenses 240000
We are asked to calculate the break-even unit sales, the margin of safety in dollars and degree of operating leverage. To do this, we have to repeat the whole process of calculation of the degree of operating leverages with the new given data.
Data | Amount in $ | |
Unit sales | 600 | units |
Selling price per unit | 10000 | Per unit |
Variable expenses per unit | 7500 | per unit |
Fixed expenses | 1200000 |
Calculation of degree of operating leverage:
$ Amount using Excel formula | |
Selling price per unit | 10000 |
Variable expenses per unit | 7500 |
Contribution margin per unit | 2500 |
CM ratio | 0.25 or 25% |
Variable expense ratio | 0.75 or 75% |
Break-even analysis: | |
Break-even in unit sales | 480 |
Break-even in dollar sales | 4800000 |
Margin of safety: | |
Margin of safety in dollars | 1200000 |
Margin of safety in percentage | 0.20 or 20% |
Degree of operating leverage: | |
Sales | 6000000 |
Variable expenses | 4500000 |
Contribution margin | 1500000 |
Fixed expenses | 1200000 |
Net operating income | 300000 |
Degree of operating leverage | 5.00 |
Therefore, the break-even unit sales are 480 units; margin of safety in dollars is $1200000; and degree of operating leverage is 5.
5a.
Introduction:
Degree of operating leverage: When we observe any business transactions, we observe that the operating income of the company is fluctuating according to the changes in the sales. The measurement of this sort of fluctuation can be termed as the degree of operating leverage.
Requirement 5b
The degree of operating income leverage when the aim is to sell 600 units per year.
5a.

Answer to Problem 1AE
The excel application gives an error message “#DIV/0!” as the divisor is 0. Therefore, it is advised to proceed with the plan discussed in 5(a).
Explanation of Solution
The given information is as follows:
Data | Amount in $ | |
Unit sales | 600 | units |
Selling price per unit | 9000 | Per unit |
Variable expenses per unit | 7500 | per unit |
Fixed expenses | 900000 |
Calculation of degree of operating leverage:
Amount using Excel formula | |
Selling price per unit | 9000 |
Variable expenses per unit | 7500 |
Contribution margin per unit | 1500 |
CM ratio | 0.16 or 17% |
Variable expense ratio | 0.83 or 83% |
Break-even analysis: | |
Break-even in unit sales | 600 |
Break-even in dollar sales | 5400000 |
Margin of safety: | |
Margin of safety in dollars | 0 |
Margin of safety in percentage | 0.00 |
Degree of operating leverage: | |
Sales | 5400000 |
Variable expenses | 4500000 |
Contribution margin | 900000 |
Fixed expenses | 900000 |
Net operating income | 0 |
Degree of operating leverage | #DIV/0! |
From the above calculation, it is clear that the execution of this plan is not working properly as it is resulting in any net operating income. Since net operating income is 0, the excel sheet is showing the error message “#DIV/0!” as the divisor is 0. Therefore, it is advised to proceed with the plan discussed in 5(a).
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