Question 02:

Teri Hall has recently opened Sheer Elegance, Inc., a store specializing in fashionable stockings. Ms. Hall has just completed a course in managerial accounting, and she believes that she can apply certain aspects of the course to her business. She is particularly interested in adopting the cost volume- profit (CVP) approach to decision making. Thus, she has prepared the following analysis:

Sales price per pair of stockings . . . . . . . . . . . . . . . . . $2.00

Variable expense per pair of stockings . . . . . . . . . . . . 0.80

Contribution margin per pair of stockings . . . . . . . . .. $1.20

Fixed expense per year:

Building rental . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $12,000

Equipment depreciation . . . . . . . . . . . . . . . . . . . . . 3,000

Selling . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30,000

Administrative . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,000

Total fixed expense . . . . . . . . . . . . . . . . . . . . . . . . . . $60,000

Required:

Ms. Hall is confident that with some effort she can increase sales by 20% next year. What would be the expected percentage increase in net operating income? Use the degree of operating leverage concept to compute your answer.