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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

  1. 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 39,000 units follow:

    Process 1 Process 2
    Sales $10,296,000 $10,296,000
    Variable expenses 3,978,000 5,772,000
    Contribution margin $6,318,000 $4,524,000
    Less total fixed expenses 3,505,265 1,386,890
    Operating income $2,812,735 $3,137,110
    Unit selling price $264 $264
    Unit variable cost $102 $148
    Unit contribution margin $162 $116

    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 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 $

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