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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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