Q1. ABC Company is debating whether to purchase new equipment that would increase fixed costs from Nu 1, 90,000 to Nu 4, 30,000 and decrease variable costs from Nu14 per unit to Nu 8 per unit. If it were to implement the change at its current production level of 2, 50,000, profit would not change. Selling price is Nu 20 per unit and the total unit sold is 40,000

Required:

a) Prepare income statement showing the changes to fixed and variable costs (3)

b) Calculate the degree of operating leverage for each situation and explain the change. (2)

c) Comment on the net income position of the company if sales increased by Nu 20,000. Other variables remain unchanged.