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Cornerstones of Cost Accounting 1st Edition by Don Hansen,Maryanne Mowen
Edition 1ISBN: 978-0538736787Cornerstones of Cost Accounting 1st Edition by Don Hansen,Maryanne Mowen
Edition 1ISBN: 978-0538736787 Exercise 34
DEGREE OF OPERATING LEVERAGE, PERCENT CHANGE IN PROFIT
Sharda Company is considering two different processes to make its product-process 1 and process 2. Process 1 requires Sharda to manufacture subcomponents of the product in-house. As a result, materials are less expensive, but fixed overhead is higher. Process 2 involves purchasing all subcomponents from outside suppliers. The direct materials costs are higher, but fixed factory overhead is considerably lower. Relevant data for a sales level of 30,000 units follow:
Required:
1. Compute the degree of operating leverage for each process.
2. Suppose that sales are 30 percent higher than budgeted. By what percentage will operating income increase for each process? What will be the increase in operating income for each system? What will be the total operating income for each process?
3. What if unit sales are 10 percent lower than budgeted? By what percentage will operating income decrease for each process? What will be the total operating income for each process?
Sharda Company is considering two different processes to make its product-process 1 and process 2. Process 1 requires Sharda to manufacture subcomponents of the product in-house. As a result, materials are less expensive, but fixed overhead is higher. Process 2 involves purchasing all subcomponents from outside suppliers. The direct materials costs are higher, but fixed factory overhead is considerably lower. Relevant data for a sales level of 30,000 units follow:
Required:
1. Compute the degree of operating leverage for each process.
2. Suppose that sales are 30 percent higher than budgeted. By what percentage will operating income increase for each process? What will be the increase in operating income for each system? What will be the total operating income for each process?
3. What if unit sales are 10 percent lower than budgeted? By what percentage will operating income decrease for each process? What will be the total operating income for each process?
Explanation
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Degree of Operating Leverage (Accounting...
Cornerstones of Cost Accounting 1st Edition by Don Hansen,Maryanne Mowen
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