Exercise 9 (Degree of Operating Leverage) Franda Company installs home theater systems. The company's most recent...

 

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Exercise 9 (Degree of Operating Leverage) Franda Company installs home theater systems. The company's most recent monthly contribution format income statement appears below: Selling price Variable expenses Contribution margin Fixed expenses Net operating income Required: Amount Percent of Sales P120,000 100% 84,000 70% 36,000 30% 24,000 P 12,000 1. Compute the company's degree of operating leverage. 2. Using the degree of operating leverage, estimate the impact on net operating income of a 10% increase in sales. 3. Verify your estimate from part (2) above by constructing a new contribution format income statement for the company assuming a 10% increase in sales. Exercise 4 (Operating Leverage) Mega Doors Company sells prehung doors to home builders. The doors are sold for P600 each. Variable costs are P420 per door, and fixed costs total P4,500,000 per year. The company is currently selling 30,000 doors per year. Required: 1. Prepare a contribution format income statement for the company at the present level of sales and compute the degree of operating leverage. 2. Management is confident that the company can sell 37,500 doors next year (an increase of 7,500 doors, or 25%, over current sales). Compute the following: a. The expected percentage increase in net operating income for next year. b. The expected total peso net operating income for the next year. (Do not prepare an income statement; use the degree of operating leverage to compute your answer.) Exercise 9 (Degree of Operating Leverage) Franda Company installs home theater systems. The company's most recent monthly contribution format income statement appears below: Selling price Variable expenses Contribution margin Fixed expenses Net operating income Required: Amount Percent of Sales P120,000 100% 84,000 70% 36,000 30% 24,000 P 12,000 1. Compute the company's degree of operating leverage. 2. Using the degree of operating leverage, estimate the impact on net operating income of a 10% increase in sales. 3. Verify your estimate from part (2) above by constructing a new contribution format income statement for the company assuming a 10% increase in sales. Exercise 4 (Operating Leverage) Mega Doors Company sells prehung doors to home builders. The doors are sold for P600 each. Variable costs are P420 per door, and fixed costs total P4,500,000 per year. The company is currently selling 30,000 doors per year. Required: 1. Prepare a contribution format income statement for the company at the present level of sales and compute the degree of operating leverage. 2. Management is confident that the company can sell 37,500 doors next year (an increase of 7,500 doors, or 25%, over current sales). Compute the following: a. The expected percentage increase in net operating income for next year. b. The expected total peso net operating income for the next year. (Do not prepare an income statement; use the degree of operating leverage to compute your answer.)