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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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