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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 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 30,000 units follow:

		Process 1		Process 2
Sales		$7,740,000		$7,740,000
Variable expenses		2,940,000		4,380,000
Contribution margin		$4,800,000		$3,360,000
Less total fixed expenses		3,768,515		1,529,180
Operating income		$1,031,485		$1,830,820
Unit selling price		$258		$258
Unit variable cost		$98		$146
Unit contribution margin		$160		$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 intermediate calculations and final answers to the nearest dollar. Use the rounded answers in subsequent calculations.

Process 1	$fill in the blank 11
Process 2	$fill in the blank 12