Impact of Increased Sales on Operating Income Using the Degree of Operating Leverage Head-First Company had planned to sell 5,000 bicycle helmets at $70 each in the coming year. Unit variable cost is $42 (includes direct materials, direct labor, variable factory overhead, and variable selling expense). Total fixed cost equals $49,500 (includes fixed factory overhead and fixed selling and administrative expense). Operating income at 5,000 units sold is $90,500. The degree of operating leverage is 1.5. Now Head-First expects to increase sales by 10% next year. Required: 1. Calculate the percent change in operating income expected. 2. Calculate the operating income expected next year using the percent change in operating income calculated in Requirement 1.
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.
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Impact of Increased Sales on Operating Income Using the Degree of Operating Leverage
Head-First Company had planned to sell 5,000 bicycle helmets at $70 each in the coming year. Unit variable cost is $42 (includes direct materials, direct labor, variable factory
overhead , and variable selling expense). Total fixed cost equals $49,500 (includes fixed factory overhead and fixed selling and administrative expense). Operating income at 5,000 units sold is $90,500. The degree of operating leverage is 1.5. Now Head-First expects to increase sales by 10% next year.Required:
1. Calculate the percent change in operating income expected.
2. Calculate the operating income expected next year using the percent change in operating income calculated in Requirement 1.
Degree of Operating leverage measure that how much operating Income will change as a result of change in sales.
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