Sells authentic Amish quilts on her website. Suppose Sally expects to sell 1 comma 800 quilts during the coming year. Her average sales price per quilt is $ 350, and her average cost per quilt is $ 150. Her fixed expenses total $ 135 comma 000. Compute Sally's operating leverage factor at an expected sales level of 1 comma 800 quilts. If sales volume increases 15%, by what percentage will her operating income change? Prove your answer by calculating operating income at a sales volume of 1 comma 800 and at a sales volume of 2 comma 070.

1) Operating Leverage Factor = Contribution margin / net income

                                                = $360,000 / $225,000

                                                = 1.6

2 ) % change in Net income = 1.6 *15%

                                              =24%

PROOF  

Income Statement                              1,800 units            2,070 units

Sales                                                 $630,000               $724,500

Variable cost                                   -$270,000              -$310,500

Contribution                                     $360,000               $414,000

Fixed Cost                                       -$135,000               -$135,000

Net Income                                       $225,000               $279,000

change = 279,000 - 225,000 = $54,000

% Change = $54,000 / $225,000

                 = 0.24 *100 = 24%

Explanation:

1) Income Statement    

Sales (1,800 *$350)                                                     $630,000

Variable Cost (1,800*$150)                                        -$270,000

Contribution                                                                $360,000

Fixed Cost                                                                 -$135,000

Net Income                                                                 $225,000

It will increase by 37.5%

Explanation:

we solve for the variable cost first:

135,000 fixed cost / 1,800 units = 75

average cost 150

less unit fixed cost of 75

variable cost 75

contribution: (350 - 75)/ 350 = 0,7857

Now we construct the operating income at the given sales level

sales revenue 1,800 x 350 = 630,000

variable cost 1,800 x 75 =      (135,000)

contribution                            495,000

fixed  cost                                135,000  

operating income                  360,000

increase of 15% in sales 1,800  x 1.15 = 2,070

sales revenue 2,070 x 350 =   724,500

variable cost   2.070 x   75  =  (155,250)  

contribution                              569,250

fixed  cost                                (135,000)  

operating income                     434,250

Now, we solve for the operating leverage

495,000 / 360,000 = 1.375

360,000 x (1 + 1.375 x 0.15) = 434,250

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