Question Solved1 Answer Peyton Place Corporation had the following income statement for 2016: Sales $27,500 Variable expenses 16,500 Contribution margin $11,000 Fixed expenses 4,400 Operating income $6,600 Required: Calculate the operating leverage ratio. If sales increase by 20 percent, what will be the percentage change in income? If sales increase by $16,500, how much will income increase?

MTJ28N The Asker · Accounting
  1. Peyton Place Corporation had the following income statement for 2016:

Sales

$27,500

Variable expenses

16,500

Contribution margin

$11,000

Fixed expenses

4,400

Operating income

$6,600

Required:

  1. Calculate the operating leverage ratio.
  2. If sales increase by 20 percent, what will be the percentage change in income?
  3. If sales increase by $16,500, how much will income increase?

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a. Operating leverage ratio = Contribution margin / Operating income                                        = 11,000 / 6,600                                        = 1.67 b.   Amount ($) Sales  33,000 Less: Variable expenses 19,800 Contribution margin 13,200 Less: Fixed expenses 4,400 Operating Income 8,800 If sales increase by 20%, new sales would be = 27,500 + (27,500*20%) = 33,000 Variable expenses will also be increased by 20% = 16,500 + (16,500 * 20%) = 19,800 Fixed expenses always remains constant. Percentage change in Income = (8,800 - 6,600) / 6,600                       ... See the full answer