Vicki sells authentic Amish quilts on her website. Suppose Vicki expects to sell 1 comma 000 quilts during the coming year. Her average sales price per quilt is $ 250, and her average cost per quilt is $ 150. Her fixed expenses total $ 50 comma 000. Compute Vicki's operating leverage factor at an expected sales level of 1 comma 000 quilts. If sales volume increases 20%, by what percentage will her operating income change? Prove your answer by calculating operating income at a sales volume of 1 comma 000 and at a sales volume of 1 comma 200.

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TomShelby TomShelby · Answer 1 · 2019-10-25T00:08:23+02:00

Answer:

2 operating leverage

An increase of 20% will convert into 40%

Prove:

increase in sale: 1,200 / 1,000 - 1 = 20%

increase in operating income: 70,000 / 50,000 - 1 = 40%

Explanation:

operating leverage: contribution/profit

contribution: sales revenue - variable cost:

1,000 x (250 - 150) = 100,000

proft: contribution - fixed cost: 100,000 - 1,000 x 50 = 50,000

100,000 / 50,000 = 2 operating leverage

An increase of 20% will convert into 40% increase in the net operating income

1,200 x (250 - 150) -50,000 = 70,000

increase in sale: 1,200 / 1,000 - 1 = 20%

increasei noperating income: 70,000 / 50,000 - 1 = 40%