Question
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
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 | $9,500,000 | $9,500,000 | ||
Variable expenses | 3,762,000 | 5,624,000 | ||
Contribution margin | $5,738,000 | $3,876,000 | ||
Less total fixed expenses | 3,578,975 | 1,471,210 | ||
Operating income | $2,159,025 | $2,404,790 | ||
Unit selling price | $250 | $250 | ||
Unit variable cost | $99 | $148 | ||
Unit contribution margin | $151 | $102 |
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 | |
Process 2 |
2. Suppose that sales are 20 percent higher than budgeted. By what percentage will operating income increase for each process?
Process 1 | % | |
Process 2 | % |
What will be the increase in operating income for each system? Round your answers to the nearest dollar.
Process 1 | $ |
Process 2 | $ |
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 | $ |
Process 2 | $ |
3. What if unit sales are 10 percent lower than budgeted? By what percentage will operating income decrease for each process?
Process 1 | % | |
Process 2 | % |
What will be the total operating income for each process? Round your answers to the nearest dollar.
Process 1 | $ |
Process 2 | $ |
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