Accounting

3-25

Operating leverage - very important in net income

Financial leverage -

Combine leverage -

Leverage - Makes everything zoom up side and down side.

Leverage – Greed!!!

“Greed is good”

Degree of operating leverage = contribution margin / operating income

= (Selling price – Variable cost) * number of units / operating cost

Operating leverage

3-25

1.a. 34

b. 0

2. option 1 should be greater than 100

Option 2 should be less than 100

3. option 1

Contribution Margin (150*100) $15000

Operating Income (150*100-5000) $10000

Operating Leverage (Contribution Margin/Operating Income) 1.50

Option 2

10000

10000

1.00

*option 1 is great

4.

3-31

Move the variable and fixed together- much more clear picture for the contribution margin.

2. contribution margin per unit = $4 unit

Breakeven quantity = 7500 unit

Selling price = 10 per unit

Contribution margin percentage =(40000 / 100000)

=(contribution margin / Revenue)

=40%

3. margin safety (in units)

=Unit s sold – Breakeven quantity

=10000 – 7500

=$2500 unit

4.

Mirabella Cosmetics |

Operating Income Statement, June 2011 |

Units sold |   | 8,000 |

Revenues |   | $ 80,000 |

Contribution margin (Revenues x CM percentage of 40%)* |   | 32,000 |

Fixed costs |   |   |

Fixed manufacturing costs | $ 20,000 |   |

Fixed marketing & administration costs | 10,000 |   |

Total fixed costs |   | 30,000 |

Operating income |   | 2,000 |

Taxes (30%) |   | 600 |

Net Income |   | 1,400 |

  |   |   |

*Contribution margin percentage = |   |   |

Contribution margin | $ 40,000 |   |

÷ Revenues | $ 100,000 |   |

CM% | 40% |   |

3-32

1. Current system = Total cost*probability

Partially automated system = Total cost*probability

Fully...