Question
7. Degree of Operating Leverage, Percent Change in Profit Ringsmith Company is considering two different processes to make its productprocess 1 and process 2. Process
7.
Degree of Operating Leverage, Percent Change in Profit
Ringsmith Company is considering two different processes to make its productprocess 1 and process 2. Process 1 requires Ringsmith to manufacture subcomponents of the product in-house. As a result, materials are less expensive, but fixed overhead is higher. Process 2 involves purchasing all subcomponents from outside suppliers. The direct materials costs are higher, but fixed factory overhead is considerably lower. Relevant data for a sales level of 38,000 units follow:
Process 1 | Process 2 | |||
Sales | $9,652,000 | $9,652,000 | ||
Variable expenses | 4,066,000 | 5,396,000 | ||
Contribution margin | $5,586,000 | $4,256,000 | ||
Less total fixed expenses | 3,589,505 | 1,402,700 | ||
Operating income | $1,996,495 | $2,853,300 | ||
Unit selling price | $254 | $254 | ||
Unit variable cost | $107 | $142 | ||
Unit contribution margin | $147 | $112 |
Required:
1. Compute the degree of operating leverage for each process. Round your answers to one decimal place. Use the rounded answers in subsequent calculations.
Process 1 | fill in the blank 1 |
Process 2 | fill in the blank 2 |
2. Suppose that sales are 20 percent higher than budgeted. By what percentage will operating income increase for each process?
Process 1 | fill in the blank 3 | % |
Process 2 | fill in the blank 4 | % |
What will be the increase in operating income for each system? Round your answers to the nearest dollar.
Process 1 | $fill in the blank 5 |
Process 2 | $fill in the blank 6 |
What will be the total operating income for each process? Round your intermediate calculations and final answers to the nearest dollar. Use the rounded answers in subsequent calculations.
Process 1 | $fill in the blank 7 |
Process 2 | $fill in the blank 8 |
3. What if unit sales are 10 percent lower than budgeted? By what percentage will operating income decrease for each process?
Process 1 | fill in the blank 9 | % |
Process 2 | fill in the blank 10 | % |
What will be the total operating income for each process? Round your answers to the nearest dollar.
Process 1 | $fill in the blank 11 |
Process 2 | $fill in the blank 12 |
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