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13. Ostler Company's net operating income last year was $10,000 and its contribution margin was $50,000. Using the operating leverage concept, if the company's sales increase next year by 8 percent, net operating income can be expected to increase by:

  • a.

    20%

  • b.

    16%

  • c.

    160%

  • D.

    40%

Degree of operating leverage = Contribution margin

Net operating income

Degree of operating leverage = $50,000 Percent increase in net operating income

$10,000 = 5

= Percent increase in sales × Degree of operating leverage = 8% × 5 = 40%

14. E.D. Manufacturing, Inc. produces and sells ice skates. The current net operating income is $40,000, with a degree of operating leverage of 3. If sales increase by 10%, how much total net operating income should be expected?

  • a.

    $12,000

  • B.

    $52,000

  • c.

    $44,000

  • d.

    None of these.

Percent increase in net operating income = Percent increase in sales × Degree of operating leverage = 10% × 3 = 30% Current net operating income × Percent increase = Increase in net operating income $40,000 × 30% = $12,000 Increase in net operating income Current net operating income + Increase in net operating income = Expected net operating income = $40,000 + $12,000 = $52,000

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