This preview shows pages 1–2. Sign up to view the full content.
This preview has intentionally blurred sections. Sign up to view the full version.View Full Document
Unformatted text preview: affect this change in sales will have on each factorys net operating income. Percent Increase in Sales (a) Degree of Operating Leverage (b) Percent Increase in Net Operating Income (a x b) Peoria 20% 2.5 - ($15,000/$6,000) 50% Problem Rockford 20% 1.66 -($15,000/$6,000) 33.33% Peorias Degree of Operating Leverage = $15,000 / $6,000 = 2.5 Rockfords Degree of Operating Leverage = $10,000 / $6,000 = 1.66 Peorias Estimated Increase in Operating Income = $6,000 * 50% = $3,000 Rockfords Estimated Increase in Operating Income = $6,000 * 33.33% = $2,000 Peoria would have an increase in operating income of $3,000, while Rockford would only have an increase of $2,000. The reason for this difference is that Peorias operating income is more sensitive to a change in sales because it has a higher contribution margin. Solution...
View Full Document