Problem A. Eneliko Company installs home theater systems.

The companys most recent monthly contribution

format income statement appears below:

Required:
1. Compute the companys 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.
Problem B. Lucky Products markets two computer games: Predator and Runway. A contribution format
income statement for a recent month for the two games appears below:

Required:
1. Compute the overall contribution margin (CM) ratio for the company.
2. Compute the overall break-even point for the company in sales dollars.
3. Verify the overall break-even point for the company by constructing a contribution format income statement
showing the appropriate levels of sales for the two products.
Problem C. Okabee Enterprises is the distributor for two products, Model A100 and Model B900. Monthly
sales and the contribution margin ratios for the two products follow:

The companys fixed expenses total $598,500 per month.

Required:
1. Prepare a contribution format income statement for the company as a whole.
2. Compute the break-even point for the company based on the current sales mix.
3. If sales increase by $50,000 per month, by how much would you expect net operating income to increase?
What are your assumptions?

Problem D. Superior Door Company sells pre-hung doors to home builders. The doors are sold for $60 each.
Variable costs are $42 per door, and fixed costs total $450,000 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 net operating income for next year. (Do not prepare an income statement; use the degree of
operating leverage to compute your answer.)
Problem E. Teri Hall has recently opened Sheer Elegance, Inc., a store specializing in fashionable stockings.
Ms. Hall has just completed a course in managerial accounting, and she believes that she can apply certain
aspects of the course to her business. She is particularly interested in adopting the cost-volume- profit (CVP)
approach to decision making. Thus, she has prepared the following analysis:

Required:
1. How many pairs of stockings must be sold to break even? What does this represent in total dollar sales?
2. How many pairs of stockings must be sold to earn a $9,000 target profit for the first year?
4. Ms. Hall now has one full-time and one part-time salesperson working in the store. It will cost her an
additional $8,000 per year to convert the part-time position to a full-time position. Ms. Hall believes that the
change would bring in an additional $20,000 in sales each year. Should she convert the position? Use the
incremental approach. (Do not prepare an income statement.)
5. Refer to the original data. Actual operating results for the first year are as follows:
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $125,000
Variable expenses . . . . . . . . . . . . . . . . . . . . . . . . . . 50,000
Contribution margin . . . . . . . . . . . . . . . . . . . . . . . . . 75,000
Fixed expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60,000
Net operating income . . . . . . . . . . . . . . . . . . . . . . . . $ 15,000
a. What is the stores degree of operating leverage?
b. Ms. Hall is confident that with some effort she can increase sales by 20% next year. What would be the
expected percentage increase in net operating income? Use the degree of operating leverage concept to compute
your answer.