Degree of Operating Leverage, Percent Change in Profit

Ringsmith Company is considering two different processes to make its product?process 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 25,000 units follow:

Degree of Operating Leverage, Percent Change in Profit Ringsmith Company is considering two different processes to make its product-process 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 25,000 units follow: Process 1 Process 2 Sales $6,250,000 $6,250,000 Variable expenses 2,675,000 3,650,000 Contribution margin $3,575,000 $2,600,000 Less total fixed expenses 3,747,455 1,360,540 Operating income $-172,455 $1,239,460 Unit selling price $250 $250 Unit variable cost $107 $146 Unit contribution margin $143 $104 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 -20.7 V Process 2 2.1 2. Suppose that sales are 20 percent higher than budgeted. By what percentage will operating income increase for each process? Process 1 -4.1 X Process 2 42 What will be the increase in operating income for each system? Round your answers to the nearest dollar. Process 1 707,065.5 X Process 2 508, 178.6 XWhat 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 1 534,610.5 X Process 2 1,747,638.6 X 3. What if unit sales are 10 percent lower than budgeted? By what percentage will operating income decrease for each process? Process 1 -0.41 X % Process 2 42.5 X What will be the total operating income for each process? Round your answers to the nearest dollar. Process 1 -879,479.5 X Process 2 718,886.8 X