Question 2: Multiple Products, Break-Even Analysis, Operating Leverage

Carlyle Lighting Products produces two different types of lamps: a floor lamp and a desk lamp.

Floor lamps sell for $30 and desk lamps sell for $20.

The projected income statement for the upcoming year follows:

Sales $600,000

Less: Variable costs 400,000

Contribution margin 200,000

Less: Fixed costs 150,000

Operating income $50,000

The owner of Carlyles estimates that 60% of the sales revenues will be produced by floor lamps and the remaining 40% by desk lamps.

Floor lamps are also responsible for 60% of the variable expenses. Of the fixed expenses, one-third are common to both products, and one-half are directly traceable to the floor lamp product line.

Required:

1. Compute the degree of operating leverage for Carlyle Lighting Products. Now assume that the actual revenues will be 40 percent higher than the projected revenues.
2. By what percentage will profits increase with this change in sales volume? What is the theory behind the operating leverage concept?