Question

Hudson Co. reports the contribution margin income statement for 2017. HUDSON CO. Contribution Margin Income Statement For Year Ended December 31, 2017 Sales (10,500 units at $225 each) $ 2,362,500 Variable costs (10,500 units at $180 each) 1,890,000 Contribution margin $ 472,500 Fixed costs 315,000 Pretax income $ 157,500 1. Compute the company’s degree of operating leverage for 2017. 2. If sales decrease by 4% in 2018, what will be the company’s pretax income? 3. Assume sales for 2018 decrease by 4%. Prepare a contribution margin income statement for 2018.

Answer 1

Answer:

1) The company’s degree of operating leverage (DOL) for 2017 was 3.00

2) The company’s pretax income would be $138,600 if sales decrease by 4%

3) Please relate to the MS excel sheet attached to this answer

Explanation:

Hi, well, first we need to present the equation to find the "degree of operating leverage" (DOL)

$DOL=\frac{Contribution Margin}{Operating Income}$

Therefore:

$DOL=\frac{472,500}{157,500} =3.00$

So, the answer to question 1 is: DOL = 3.00

Now, if sales decrease by 4%, that means that the units sold would be 10,500*(1-0.04)=10,080, therefore the pretax income would be:

$PretaxIncome=(Price-VarCost)*Units-FixedCosts$

$PretaxIncome=(225-180)*10,080-315,000=138,600$

So, the answer for question 2) is Pretax Income = $138,600

For question 3, please relate to the excel sheet attached to this document.

Best of luck.

Download xlsx