Unit 1: Cost-Volume-Profit Analysis Economics Worksheet With Answers - Cma311s Notes, 2010 Page 19
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27The operating leverage is a management instrument that shows, relatively easily, the effect of a change in
turnover on net income, without detailed statements having to be prepared.
Example 10
The management of Shilongo Ltd supplied the following details:
N$
Sales
100 000
Variable cost
20 000
Fixed cost
40 000
Required:
10.1
Calculate the operating leverage factor
10.2
Use the operating leverage factor calculated in 10.1 above to compute the increase in net income if
sales were to increase by 15%.
Solution to Example 10
10.1
Operating leverage factor = Contribution ÷ Net profit
= N$80 000 ÷ N$40 000
= 2
10.2
% increase in net income = % increase in sales x operating leverage factor
= 15% x 2
= 30%
Activity 11
The following income statement has been supplied to you:
Sales revenue
N$500 000
Less: Variable costs
300 000
= Contribution
200 000
Less: Fixed costs
150 000
= Net income
50 000
Required:
11.1
Show the firm’s cost structure by indicating the percentage of the firm’s revenue represented by each
item on the income statement.
11.2
Suppose the firm’s revenue declines by 15%. Use the contribution % to calculate the resulting
decrease in net income.
11.3
Compute the firm’s operating leverage factor when sales revenue is N$500 000.
11.4
Use the operating leverage factor to calculate the increase in net income resulting from a 20%
increase in sales revenue.
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