Asked by Madeline Boutot on Jul 08, 2024
Verified
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.)
A) 1.13%
B) 88.89%
C) 22.22%
D) 4.50%
Operating Leverage
The extent to which a company uses fixed costs in its cost structure, impacting its earnings volatility.
Net Operating Income
Net Operating Income (NOI) is a financial metric that calculates a company's income after all operating expenses, excluding taxes and interest, have been deducted from total revenue.
Salesvolume
Sales volume refers to the number of units of a product or service sold by a company in a specified period.
- Learn to evaluate and calculate the measure of operating leverage.
Verified Answer
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.
Learning Objectives
- Learn to evaluate and calculate the measure of operating leverage.
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