Chapter 21, Problem 25E

To determine

Concept Introduction:

Degree of operating leverage:

The Degree of operating leverage shows the relation between change in net operating income and change in sales. The formulas for degree of operating leverage are as follows:

  $Degreeofoperatingleverage=\frac{ContributionMargin}{Operatingincome}$

  $Changeinoperatingincome=Changesinsales\times Degreeofoperatingleverage$

Requirement-1:

The Degree of operating leverage

To determine

Concept Introduction:

Degree of operating leverage:

The Degree of operating leverage shows the relation between change in net operating income and change in sales. The formulas for degree of operating leverage are as follows:

  $Degreeofoperatingleverage=\frac{ContributionMargin}{Operatingincome}$

  $Changeinoperatingincome=Changesinsales\times Degreeofoperatingleverage$

Requirement-2:

The Change in Net income after decrease in sales by 5%

To determine

Concept Introduction:

Degree of operating leverage:

The Degree of operating leverage shows the relation between change in net operating income and change in sales. The formulas for degree of operating leverage are as follows:

  $Degreeofoperatingleverage=\frac{ContributionMargin}{Operatingincome}$

  $Changeinoperatingincome=Changesinsales\times Degreeofoperatingleverage$

Requirement-3:

To Prepare:

The Contribution margin income statement if sales decreases by 5%