hapter 16 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 26,000 units follow: Process 1 Process 2 Sales $6,500,000 $6,500,000 Variable expenses 2,678,000 3,744,000 Contribution margin $2,756,000 $3,822,000 Less total fixed expenses 1,386,890 3,736,925 Operating income $85,075 $1,369,110 Unit selling price $250 $250 $103 $144 Unit variable cost $106 $147 Unit contribution margin 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 wha: percentage will operating Income increase 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