Question

Warrix Corporation has provided the following contribution format income statement. Assume that the following information is within the relevant range.
Sales (3,000 units) $120,000
Variable expenses 90,000
Contribution margin 30,000
Fixed expenses 27,000
Net operating income $3,000

a. If sales increase to 3,100 units, net operating income would be closest to: ____________
b. If sales increase to 3,100 units, the breakeven point in units would:_____________
c. If sales increase to 3,100 units, the degree of operating leverage would:___________

Answer 1

Answer:

Results are below.

Explanation:

Giving the following information:

Sales (3,000 units) $120,000

Variable expenses 90,000

Contribution margin 30,000

Fixed expenses 27,000

Net operating income $3,000

First, we need to calculate the unitary contribution margin:

Unitary contribution margin= 30,000/3,000= $10

a) Sales= 3,100

Contribution margin= 3,100*10= 31,000

Fixed expense= (27,000)

Net operating income= 4,000

b) To calculate the break-even point in units, we need to use the following formula:

Break-even point in units= fixed costs/ contribution margin per unit

Break-even point in units= 27,000/10

Break-even point in units= 2,700

c) Finally, the degree of operating leverage:

Degree of operating leverage= % change in income/ % change in sales

Degree of operating leverage= [(4,000-3,000)/3,000] / [(3,100-3,000) / 3,000]

Degree of operating leverage= 10