Lofft Corporation has provided the following contribution format income statement. Assume that the following information is within the relevant range. Using the degree of operating leverage, the estimated percent increase in net operating income as the result of a 10% increase in salesvolume is closest to: (Round your intermediate calculations to 1 decimal place.)

Question

Lofft Corporation has provided the following contribution format income statement. Assume that the following information is within the relevant range.  Using the degree of operating leverage, the estimated percent increase in net operating income as the result of a 10% increase in salesvolume is closest to: (Round your intermediate calculations to 1 decimal place.)

Quizplus · Accepted Answer

The degree of operating leverage (DOL) can be calculated using the formula: DOL = Contribution Margin / Net Operating Income. From the given income statement, the contribution margin for the current level of activity is $300,000 ($600,000 - $300,000). The net operating income is $90,000. Therefore, the DOL is 3.33 ($300,000 / $90,000).

With a 10% increase in sales volume, total sales revenue would increase to $660,000 ($600,000 x 1.1). The contribution margin would increase by 10% to $330,000 ($300,000 x 1.1). Using the DOL, the estimated percent increase in net operating income would be 22.22% (3.33 x 0.1). Therefore, the answer is C.

Lofft Corporation Has Provided the Following Contribution Format Income Statement