Reference no: EM131993677
Degree of Operating Leverage, Percent Change in Profit Ringsmith Company is considering two different processes to make its product—process 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 30,000 units follow: Process 1 Process 2 Sales $8,220,000 $8,220,000 Varoable expenses 3,150,000 4,020,000 Contribution margin $5,070,000 $4,200,000 Less total fixed expenses 3,636,890 1,487,020 Operating income $1,433,110 $2,712,980 Unit selling price $274 $274 Unit variable cost $105 $134 Unit contribution margin $169 $140
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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