Respuesta :
1. Operating leverage is a financial estimation of the relationship between changess in profits as a result of changes in sales.
2. The calculation of the contribution margin and net income of the two plans at 9,000 units is as follows.
Plan 1 Plan 2
Sales (180*9,000) $1,620,000 $1,620,000
Variable Costs (120*9,000) 1,080,000 1,080,000
Commission (1,620,000*10%) 162,000
Contribution Margin 378,000 540,000
Fixed Cost 38,000 180,000
Net Income 340,000 $360,000
3. The computation of the operating leverage factor of the two plans at 9,000 units is as follows:
Degree of Operating Leverage = Contribution Margin / Net Income
Plan 1:
Degree of Operating Leverage = 1.11 ($378,000/$340,000)
Plan 2:
Degree of Operating Leverage = 1.5 ($540,000/$360,000)
Plan 2 has a higher degree of operating leverage when compared to Plan 1. The reason is that it employs a higher amount of fixed costs, generating a higher contribution margin than Plan 1.
4. If demand falls from 9,000 to 7,200 units, using the operating leverage factors, the plan that would produce a larger percentage decrease in net income is shown below.
Plan 1 Plan 2
Sales (180*7,200) $1,296,000 $1,296,000
Variable Costs (120*7,200) 864,000 864,000
Commission (1,296,000*10%) 129,600
Contribution Margin 302,400 432,000
Fixed Cost 38,000 180,000
Net Income $264,400 $252,000
Net Income at 9,000 units $340,000 $360,000
Decrease in Net Income = $75,600 $108,000
Plan 2 is more leveraged than Plan 1. Thus, the decrease in the company's net income will be higher for Plan 2.
How is operating leverage computed?
The formula for computing the operating leverage is the Contribution Margin divided by the Net Income, where contribution margin is the difference between sales and variable costs.
Lower variable costs than fixed costs give way to a higher contribution margin and a higher degree of operating leverage. Higher variable costs with lower fixed costs result in lower contribution margin and lower operating leverage.
Learn more about operating leverage at https://brainly.com/question/21790059
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Question Completion:
The anticipated demand is 9,000 units. A new salesperson must be hired because the company's current sales force is working at capacity. Two compensation plans are under consideration:
Plan 1: An annual salary of $38,000 plus 10% commission based on gross sales dollars.
Plan 2: An annual salary of $180,000 and no commission.
Required:
1. What is meant by the term "operating leverage"?
2. Calculate the contribution margin and net income of the two plans at 9,000 units.
3. Compute the operating leverage factor of the two plans at 9,000 units. Which of the two plans is more highly leveraged? Why?
4. Assume that a general economic downturn occurred during year no. 2, with product demand falling from 9,000 to 7,200 units. By using the operating leverage factors, determine and show which plan would produce a larger percentage decrease in net income.
