Stratford Company distributes a lightweight lawn chair that sells for $120 per unit. Variable expenses are $60.00 per unit, and fixed expenses total $160,000 annually.

The company estimates that sales will increase by $42,000 during the coming year due to increased demand. By how much should net operating income increase?

Assume that the operating results for last year were as follows:

Sales	$	3,240,000
Variable expenses		1,620,000
Contribution margin		1,620,000
Fixed expenses		160,000
Net operating income	$	1,460,000

a.

Compute the degree of operating leverage at the current level of sales. (Round your answer to 2 decimal places.)

b.

The president expects sales to increase by 14% next year. By how much should net operating income increase? (Round your intermediate calculations to 2 decimal places and final answer to the nearest dollar amount.)

Refer to the original data. Assume that the company sold 34,500 units last year. The sales manager is convinced that a 11% reduction in the selling price, combined with a $68,000 increase in advertising expenditures, would increase annual unit sales by 50%.

a.	Prepare two contribution format income statements, one showing the results of last year