Feather Friends, Inc., distributes a high-quality wooden birdhouse that sells for $40 per unit. Variable expenses are $20.00 per unit, and fixed expenses total $180,000 per year. Its operating results for last year were as follows:

Sales $1,080,000

Variable expenses 540,000

Contribution margin 540,000

Fixed expenses 180,000

Net operating income $360,000

(a) Compute the degree of operating leverage at the current level of sales. (Round your answer to 2 decimal places.)

(b) The president expects sales to increase by 10% next year. By what percentage should net operating income increase? (Round intermediate calculations and final answer to 2 decimal places.)

Instructions are listed below.

Explanation:

Giving the following information:

Selling price = $40 per unit.

Variable expenses = $20.00 per unit

Fixed expenses = $180,000 per year.

Its operating results for last year were as follows:

Sales $1,080,000

Variable expenses 540,000

Contribution margin 540,000

Fixed expenses 180,000

Net operating income $360,000

A) Degree of operating leverage = Total contribution margin / (total contribution margin - total fixed costs)

Degree of operating leverage = 540,000 / (540,000 - 180,000)

Degree of operating leverage = 1.5

B) Increase in sales = 10%

Increase in contribution margin = 2,700*20 = 54,000

Increase in income (%) = [ (414,000 - 360,000) / (360,000) ]*100 = 15%