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:
Requirement-1:
The Degree of operating leverage
Answer to Problem 25E
The Degree of operating leverage shall be 4 times
Explanation of Solution
The Degree of operating leverage is calculated as follows:
Degree of operating leverage = Contribution Margin / Operating Income
= 432000/108000
= 4
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:
Requirement-2:
The Change in Net income after decrease in sales by 5%
Answer to Problem 25E
The Change in Net income after decrease in sales by 5% shall be decrease by 20%
Explanation of Solution
The Change in Net income after decrease in sales by 5% is calculated as follows:
Change in net income = Change in sales * Degree of operating leverage
= -5%*4
= -20%
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:
Requirement-3:
To Prepare:
The Contribution margin income statement if sales decreases by 5%
Answer to Problem 25E
The Contribution margin income statement if a sales decrease by 5% is as follows:
| Hudson Company | ||
| Contribution Margin Income Statement | ||
| For the year ended Dec. 31, 2020 | ||
| Sales | $ 2,052,000 | |
| Less: Variable Expenses | $ (1,641,600) | |
| Contribution Margin | $ 410,400 | |
| Less: Fixed Costs | $ (324,000) | |
| Income Before tax | $ 86,400 | |
Explanation of Solution
The Contribution margin income statement if a sales decrease by 5% is prepared as follows:
| Hudson Company | ||
| Contribution Margin Income Statement | ||
| For the year ended Dec. 31, 2020 | ||
| Sales (2160000*95%) | $ 2,052,000 | |
| Less: Variable Expenses (1728000*95%) | $ (1,641,600) | |
| Contribution Margin | $ 410,400 | |
| Less: Fixed Costs | $ (324,000) | |
| Income Before tax | $ 86,400 | |
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Chapter 21 Solutions
FUNDAMENTAL ACCT.PRIN.-CONNECT ACCESS
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