Exercise 4-17 Operating Leverage [LO 2, 3] Refer to the data in Exercise 4-16. Round all decimal answers to four places and all dollar answers to the nearest dollar . a. Calculate profit as a percent of sales in the prior year . b. Suppose sales in the current year increase by 15 percent . Calculate profit as a percent of sales for the new level of sales and explain why the percent is greater than the one calculated in part a. Dept A Dept B Dept C Total Sales $450,000 $ 600,000 $ 750,000 $ 1,800,000 Less: Variable cost $ 270,000 $ 450,000 $ 450,000 $1,170,000 Contribution Margin $ 180,000 $ 150,000 $ 300,000 $ 630,000 Less : Fixed Cost $70,000 $90,000 $ 100,000 $ 260,000 Profit $110,000 $60,000 $ 200,000 $ 370,000 Answer: a. Total Sales / Total Profit = % Profit of Sales $1,800,000 / $370,000 = 20.56 % b. Total Sales / Contribution = Contribution Ratio $1,000,000 / $630,000 = 35.00 % New Sales (x) Increase % = $1,800,000 (x) 115% = $2,070,000 Contribution Ratio of 35% New Contribution - Less Fixed Cost = Profit $ 724,500 - $260,000 = $464,500 $2,070,000 / $464,500 = 22.44 % Profit