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Degree of Operating Leverage, Percent Change in Profit

Ringsmith Company is considering two different processes to make its product$$process $1$ and process $2.$ Process $1$ requires Ringsmith to manufacture subcomponents of the product in$-$house. As a result, materials are less expensive, but fixed overhead is higher. Process $2$ involves purchasing all subcomponents from outside suppliers. The direct materials costs are higher, but fixed factory overhead is considerably lower. Relevant data for a sales level of $30,000$ units follow:

Process $1$ Process $2$

Sales $$8,160,000$ $$8,160,000$

Variable expenses $2,940,0003,900,000$

Contribution margin $$5,220,000$ $$4,260,000$

Less total fixed expenses $3,779,0451,476,480$

Operating income $$1,440,955$ $$2,783,520$

Unit selling price $$272$ $$272$

Unit variable cost $$98$ $$130$

Unit contribution margin $$174$ $$142$Required:

Compute the degree of operating leverage for each process. Round your answers to one decimal place. Use the rounded answers in subsequent calculations.

Process $1$

Process $2$

Suppose that sales are $20$ percent higher than budgeted. By what percentage will operating income increase for each process?

Process $1$

$\%$

Process $2$

$,$

What will be the increase in operating income for each system? Round your answers to the nearest dollar.

Process $1,$$

Process $2$

$

What will be the total operating income for each process? Round your intermediate calculations and final answers to the nearest dollar. Use the rounded answers in

subsequent calculations.

Process $1,$&

Process $2,$$

What if unit sales are $10$ percent lower than budgeted? By what percentage will operating income decrease for each process?

Process $1$

$\%$

Process $2$

$\%$

What will be the total operating income for each process? Round your intermediate calculations and final answers to the nearest dollar. Use the rounded answers in

subsequent calculations.

Process $1,$&

Process $2,$$

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