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Unformatted text preview: The degree of operating leverage (DOL) is a measure of the sensitivity of profit changes to
changes in sales volume. DOL measures the percentage of change in profit that results from a
percentage of change in sales. Degree of operating leverage = Contribution marginIOperating income The higher the degree of operating leverage, the greater the change in profit when sales change.
Percentage change in profit = DOL x Percentage change in sales C. Sensitivity Analysis and CVP Sensitivity analysis is a “what if“ technique that examines the impact of changes on an answer.
For example, computer spreadsheets are used to analyze changes in prices, variable costs,
and fixed costs on expected profits. Practice
1. The Redfish Company sells a product for $16. Unit costs are as follows: Direct Material $3.9 Direct Labor 1.40
Variable overhead 2.10
Variable selling expense 1.60 Total fixed overhead is $52,000 per year. and total fixed selling and administrative expenses
are $372950. Required:
a. Calculate variable ratio and contribution margin ratio w
I;
,\
A l\‘ 2. Sweet Things, Inc. had the following results for the yearjust ended: Sales (60,000 units) $120,000
Direct labor 6,000
Direct materials 18,000
Fixed manufacturing overhead 50,000
Variable selling expenses 6,000
Fixed administrative expenses 10 000
Net income 3 00 What is the company's breakeven sales voiume? 3, The amount that is available to be cover fixed costs after deducting variable expenses from sales
is called the: a. target profit b. breakeven point
on; margin of safety
@\.I>contribution margin 4. The breakeven point is the point at which the total contribution margin is equal to:
a. sales revenues
b. variable costs
'T.\ fixed costs
d, total costs 5. This is the brief income statement of a company:
Sales ( 5,000 units @ $12) $60000 Variable costs (45,000)
Fixed costs: g 6 900)
Operating income $ 8100
Tax expense: m
Net Income $ 4.860 Based on the given information, caiculate:
{1) Break—even in units " [M E," '
“r gt, 3 Qgﬁe
r ,
i" .i L it ' ,_
71 a 5;, l
(2) Breakeven revenue
1 . 4'5; mm 77—77 7 15%
{,0wa (3) If the desired operating income (profit) is $9,900, how much revenue this company must
make? . A i t ( 
U‘O‘mx‘ \IJa/ ‘31)» \‘ ~¢ .r 7\ “rm [,lwi‘ 7V lD‘Qn
2A ‘ , H
/ ‘009 v ) ~r ‘IL0 (4) How much is margin of safety? a w A,
J} (,1 ,U '1‘ 4,: igv‘ CO (5) How much is this firm’s degree of operating leverage? , r r". ‘ . _.
tx—n 7 \ t‘S
i) I V q may”) (6) If sales increase by 10% by what percentage operating income will increase? :)<'
1
x. x ,—K 3). 4}. 5). 6. Xeller Company makes electronic keyboards. The practice model price is $220 and
variable expenses are $190. The deluxe model price is $340 and variable expenses are
$250. The professional model price is $1,200 and variable expense per unit is $800. Total
fixed expenses are $187,000. Generally, Xeller sells 6 practice models and 3 deluxe
models for every professional model sold. Using the sales mix stated in the facts to form a package. what is the total package
contribution margin? r i‘ What is the number of deluxe models said at breakeven What is the number of professional models sold at breakeven? What is the overall sales revenue at breakeven? EllyWU
,5 )‘J‘i'rc .. “in”,
'.LJ @— 7. A graph that depicts the relationships among total variable costs. total ﬁxed costs. number oi‘units and
operating income is the
aT/_Cost graph
it”. I Volume graph Costvolumeprol‘tt graph
81 Proﬁtvolume graph
..e. Breakeven graph 8. is a measure of the sensitivity of profit changes to changes in sales volume. It measures the
percentage change in proﬁts resulting from a percentage change in sales. a. Contribution margin ratio b. Variable cost ratio on Operating leverage d,‘. Degree of operating leverage
e. Proﬁt ratio 9. in order for the breakeven computation to be meaningful to management. sales mix should be
computed using the
If i expected mix
most desirable mix
least desirable mix
traditional mix average mix over the past 5 years r” 0 .ﬁ aria: l0. Which oi‘the following is not an assumption used to prepare a eost—volumeproﬁt graph?
a linear costs within the relevant range
units produced equals units sold
e. constant sales mix constant cost ﬂuctuation all ofthese are assumptions used in preparing costvolumeAproﬁt graphs 10 ...
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 Spring '08
 Lui
 Accounting, Operating Leverage, Contribution Margin, The Redfish Company

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