
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).
Want to see more full solutions like this?
Chapter 2 Solutions
MANAGERIAL ACCOUNTING F/..(LL)-W/ACCESS
- please don't use AI tool.arrow_forwardincoporate the accounting conceptual frameworksarrow_forwarda) Define research methodology in the context of accounting theory and discuss the importance of selecting appropriate research methodology. Evaluate the strengths and limitations of quantitative and qualitative approaches in accounting research. b) Assess the role of modern accounting theories in guiding research in accounting. Discuss how contemporary theories, such as stakeholder theory, legitimacy theory, and behavioral accounting theory, shape research questions, hypotheses formulation, and empirical analysis. Question 4 Critically analyse the role of financial reporting in investment decision-making, emphasizing the qualitative characteristics that enhance the usefulness of financial statements. Discuss how financial reporting influences both investor confidence and regulatory decisions, using relevant examples.arrow_forward
- Fastarrow_forwardCODE 14 On August 1, 2010, Cheryl Newsome established Titus Realty, which completed the following transactions during the month: a. Cheryl Newsome transferred cash from a personal bank account to an account to be used for the business in exchange for capital stock, $25,000. b. Paid rent on office and equipment for the month, $2,750. c. Purchased supplies on account, $950. d. Paid creditor on account, $400. c. Earned sales commissions, receiving cash, $18,100. f. Paid automobile expenses (including rental charge) for month, $1,000, and miscel- laneous expenses, $600. g. Paid office salaries, $2,150. h. Determined that the cost of supplies used was $575. i. Paid dividends, $2,000. REQUIREMENTS: 1. Determine increase - decrease of each account and new balance 2. Prepare 3 F.S: Income statement; Retained Earnings Statement; Balance Sheet Scanned with CamScannerarrow_forwardAssume that TDW Corporation (calendar-year-end) has 2024 taxable income of $952,000 for purposes of computing the §179 expense. The company acquired the following assets during 2024: (Use MACRS Table 1, Table 2, Table 3, Table 4, and Table 5.) Asset Machinery Computer equipment Furniture Total Placed in Service September 12 February 10 April 2 Basis $ 2,270,250 263,325 880,425 $ 3,414,000 b. What is the maximum total depreciation, including §179 expense, that TDW may deduct in 2024 on the assets it placed in service in 2024, assuming no bonus depreciation? Note: Round your intermediate calculations and final answer to the nearest whole dollar amount. Maximum total depreciation deduction (including §179 expense)arrow_forward
- Evergreen Corporation (calendar-year-end) acquired the following assets during the current year: (Use MACRS Table 1 and Table 2.) Date Placed in Asset Machinery Service October 25 Original Basis $ 120,000 Computer equipment February 3 47,500 Used delivery truck* August 17 Furniture April 22 60,500 212,500 The delivery truck is not a luxury automobile. Note: Do not round intermediate calculations. Round your answers to the nearest whole dollar amount. b. What is the allowable depreciation on Evergreen's property in the current year if Evergreen does not elect out of bonus depreciation and elects out of §179 expense?arrow_forwardLina purchased a new car for use in her business during 2024. The auto was the only business asset she purchased during the year, and her business was extremely profitable. Calculate her maximum depreciation deductions (including §179 expense unless stated otherwise) for the automobile in 2024 and 2025 (Lina doesn't want to take bonus depreciation for 2024) in the following alternative scenarios (assuming half-year convention for all): (Use MACRS Table 1, Table 2, and Exhibit 10-10.) a. The vehicle cost $40,000, and business use is 100 percent (ignore §179 expense). Year Depreciation deduction 2024 2025arrow_forwardEvergreen Corporation (calendar-year-end) acquired the following assets during the current year: (Use MACRS Table 1 and Table 2.) Date Placed in Asset Machinery Service October 25 Original Basis $ 120,000 Computer equipment February 3 47,500 Used delivery truck* August 17 Furniture April 22 60,500 212,500 The delivery truck is not a luxury automobile. Note: Do not round intermediate calculations. Round your answers to the nearest whole dollar amount. a. What is the allowable depreciation on Evergreen's property in the current year, assuming Evergreen does not elect §179 expense and elects out of bonus depreciation?arrow_forward
- AccountingAccountingISBN:9781337272094Author:WARREN, Carl S., Reeve, James M., Duchac, Jonathan E.Publisher:Cengage Learning,Accounting Information SystemsAccountingISBN:9781337619202Author:Hall, James A.Publisher:Cengage Learning,
- Horngren's Cost Accounting: A Managerial Emphasis...AccountingISBN:9780134475585Author:Srikant M. Datar, Madhav V. RajanPublisher:PEARSONIntermediate AccountingAccountingISBN:9781259722660Author:J. David Spiceland, Mark W. Nelson, Wayne M ThomasPublisher:McGraw-Hill EducationFinancial and Managerial AccountingAccountingISBN:9781259726705Author:John J Wild, Ken W. Shaw, Barbara Chiappetta Fundamental Accounting PrinciplesPublisher:McGraw-Hill Education





