Answer:
1. Operating leverage = Contribution margin / Operating income
Contribution margin = (Selling price - average cost) * no. of units sold
= (375 - 175 ) * 2,000 quilts
= $400,000
Operating income = Contribution margin - Fixed expenses
= 400,000 - 200,000
= $200,000
Operating leverage = 400,000/ 200,000
= 2
2. Sales increases by 20%:
Operating income = 20% * 2
= 40%
3. At sales volume of 2,000 quilts, operating income was $200,000
Sales volume of 2,400 quilts:
Operating income = (375 - 175 ) * 2,400 quilts - 200,000
= 480,000 - 200,000
= $280,000
Percentage increase:
= (New income - old income) / old income
= (280,000 - 200,000) / 200,000
= 40%
