EXERCISE 3: For the most recent fiscal year, Sparrow Co. reported the following information: Sales Variable Costs Fixed Costs Total $570,000 $387,600 $140,000 Per Unit $28.50 $19.38 Determine the Contribution Margin and Income from Operations: Sales $ Variable Costs ) Contribution Margin $ $ Fixed Costs ( ) Net Income $ Next, calculate the Contribution Margin Ratio Contribution Margin / Sales = Contribution Margin Ratio % $ 1 $ I Determine the Unit Contribution Margin Sale Price per Unit - Variable Cost per Unit = Unit Contribution Margin $ $ The Contribution Margin Ratio and the Unit Contribution Margin (UCM) can be used to quickly estimate the impact on Net Income using certain assumptions. Example: Calculate the increase in Operating Income that would result from a $50,000 increase in Sales. Completed example below. Increase in Net Income Work Area $50,000 X 32% CM = $16,000 Page 3 of 5 Example: Calculate the increase in Operating Income that would result from a 1,000 unit increase in Sales. Hint: Use the UCM from above. Work Area Increase in Operating Income $ I OPERATING LEVERAGE Measures the mix of a business's variable costs and fixed costs. Operating Leverage can be used to evaluate the impact on Net Income from a change in Sales. The formula to calculate Operating Leverage is: Operating Leverage = Contribution Margin / Net Income