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Exercise D3-15 Hogue Sports Hut provides individual instruction and coaching to children participating in the city’s baseball, softball, basketball, and soccer youth leagues. Last year’s results were as follows: Sales revenue Variable expenses 646,000 Contribution margin 304,000 Fixed expenses Operating income $121,600 $950,000 182,400 What is Hogue Sports Hut’s degree of operating leverage? (Round answer to 2 decimal place, e.g. 13.25.) Operating leverage If Anna Hogue, the company’s president, is successful in increasing sales revenue by 8%, by what percent will the company’s operating income increase? (Round answer to 2 decimal place, eg. 13.25%.) Increase in operating income
Expert Answer
| Contribution margin | $ 304,000 | |||
| Operating Income | $ 121,600 | |||
| Operating Leverage | Contribution margin/Operating income | |||
| 304,000/121,600 | ||||
| 2.50 | ||||
| Existing | New (after 8% increase) | |||
| Sales revenue | $ 950,000 | $ 1,026,000 | (950,000*108%) | |
| Less: Variable Cost | $ 646,000 | $ 697,680 | (646,000*108%) | |
| Contribution margin | $ 304,000 | $ 328,320 | ||
| Less: Fixed Cost | $ 182,400 | $ 182,400 | ||
| Operating income | $ 121,600 | $ 145,920 | ||
| Increase in operating income | (New-Existing income)/Existing income*100 | |||
| ($145,920-121,600)/121,600*100 | ||||
| 20% | ||||
| New operating income | $ 145,920 | |||
| New Contribution margin | $ 328,320 | |||
| New operating income | $ 145,920 | |||
| New Operating Leverage | Contribution margin/Operating income | |||
| $328,320/145,920 | ||||
| 2.25 | ||||
| Answer: | Operating Leverage | 2.50 | ||
| Increase in operating income | 20% | |||
| New operating income | $ 145,920 | |||
| New Operating Leverage | 2.25 | |||
