Degree of Operating Leverage Assignment

Chapter 5: Applying Excel Data Unit sales 20,000 units $60 Selling price per unit Variable expenses per unit Fixed expenses per unit $45 per unit $240,000 Enter a formula into each of the cells marked with a ? below Review Problem: CVP Relationships Compute the CM ratio and variable expense ratio Selling price per unit Variable expenses per unit Contribution margin per unit? per unit? per unit? per unit CM ratio Variable expense ratio ? Compute the break-even Break-even in unit sales? units Break-even in dollar sales? Compute the margin of safety in dollars Margin of safety percentage Compute the degree of operating leverage Sales? Variable expenses Contribution margin Fixed expenses Net operating income ? ? Degree of operating leverage 2. Change all of the numbers in the data area of your worksheet so that it looks like this: 1 Chapter 5: Applying Excel 2 Data 3 40,000 units Unit sales 4 per 50 5 Selling price per unit $ unit 6 30 per unit Variable expenses per unit $ 760,000 7Fixed expenses If your formulas are correct, you should get the correct answers to the following questions. (a) What is the break-even in dollar sales? Break-even in dollar sales (b) What is the margin of safety percentage? Margin of safety percentage %

(c) What is the degree of operating leverage? (Round your answer to 2 decimal places.) Degree of operating leverage 3. Using the degree of operating leverage and without changing anything in your worksheet, calculate the change in net operating income if unit sales increase by 20% nta Percentage increase in net operating income % 4. Confirm your calculations in Requirement 3 above by increasing the unit sales in your worksheet by 20% so that the Data area looks like this: A B C 1 Chapter 5: Applying Excel 2 3 Data 48,000 units Unit sales 4 50 per unit 5 Selling price per unit 30 per unit 6Variable expenses per unit 7 Fixed expenses 760,000 (a) What is net operating income? (Negative amount should be indicated by a minus sign.) Net operating income (loss) (b) By what percentage did the net operating income increase? Percentage increase in net operating income 5. Thad Morgan, a motorcycle enthusiast, has been exploring the possibility of relaunching the Western Hombre brand of cycle that was popular in the 1930s. The retro-look cycle would be sold for $15,000 and at that price, Thad estimates 600 units would be sold each year. The variable cost to produce and sell the cycles would be $10,500 per unit. The annual fixed cost would be $2,160,000. a. What is the break-even in unit sales? Break-even in unit sales b. What is the margin of safety in dollars? The margin of safety in dollars c. What is the degree of operating leverage? (Round your answer to 2 decimal places.) Degree of operating leverage Thad is worried about the selling price. Rumors are circulating that other retro brands of cycles may be revived. If so, the selling price for the Western Hombre would have to be reduced to $12,000 to compete effectively. In that event Thad would also reduce fixed expenses to $1,750,000 by reducing advertising expenses, but he still hopes to sell 600 units per year. d. What would the net operating income be in this situation? (Negative amount should be indicated by a minus sign.) Net operating income (loss)