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# BA213_Answer.key.Review.Test2.pdf - page 8 / 22

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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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