Following 1s the ncome statement tor Wakeh Inc Sales 30000 u

Following 1s the ncome statement tor Wakeh Inc Sales (30,000 units) 3,750,000 2,437,500 Contribution margin 1,312,500 Variable expenses Fixed expenses975,000 Operating income 337,500 ee\"Each of the following Scenarios should be treated as independent-e Calculate the Degree of Operating Leverage- (3 marks) Calculate the New perating Income if Sales Increase bv 15% (4 marks Calculate the New Operating income if Sales Decreased by 10% (4 marks)

Solution

Degree of operating leverage = Contribution margin / Operating income

= 1,312,500 / 337,500

= 3.89

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Contribution margin ratio = Contribution margin / Sales

= 1,312,500 / 3,750,000

= 0.35

Breakeven point in sales dollars = Fixed costs / Contribution margin ratio

= 975,000 / 0.35

= 2,785,714

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Contribution margin per unit = Contribution margin / Number of units

= 1,312,500 / 30,000

= 43.75

Increased sales = 30,000 + (30,000*15%)

= 30,000 + 4,500

= 34,500

New contribution margin = Increased sales * Contribution margin per unit

= 34,500 * 43.75

= 1,509,375

New operating income = New contribution margin - Fixed expenses

= 1,509,375 - 975,000

= 534,375

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Contribution margin per unit = Contribution margin / Number of units

= 1,312,500 / 30,000

= 43.75

Decreased sales = 30,000 - (30,000*10%)

= 30,000 - 3,000

= 27,000

New contribution margin = Decreased sales * Contribution margin per unit

= 27,000 * 43.75

= 1,181,250

New operating income = New contribution margin - Fixed expenses

= 1,181,250 - 975,000

= 206,250

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Margin of safety in dollars = Sales - Breakeven sales

= 3,750,000 - 2,785,714

= 964,286