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 39,000 units follow: Process 1 Process 2 Sales $10,374,000 $10,374,000 Variable expenses 4,095,000 5,382,000 Contribution margin $6,279,000 $4,992,000 Less total fixed expenses 3,600,035 1,392,160 Operating income $2,678,965 $3,599,840 Unit selling price $266 $266 Unit variable cost $105 $138 Unit contribution margin

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 39,000 units follow: Process 1 Sales $10,374,000 4,095,000 Variable expenses Contribution margin Process 2 $10,374,000 5,382,000 $4,992,000 1,392,160 $3,599,840 $6,279,000 3,600,035 Less total fixed expenses Operating income $2,678,965 Unit selling price $266 $266 Unit variable cost $105 $138 Unit contribution margin $161 $128 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 2.3 Process 2 1.4 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 intermediate calculations and final answers to the nearest dollar. Use the rounded answers in subsequent calculations. Process 1 Process 2