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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 37,000 units follow: Process 1 Process 2 Sales $9,694,000 $9,694,000 Variable expenses 3,404,000 4,884,000 Contribution margin $6,290,000 $4,810,000 Less total fixed expenses 3,768,515 1,502,830 Operating income $2,521,485 $3,307,170 Unit selling price $262 $262 Unit variable cost $92 $132 Unit contribution margin $170 $130 Required: 1. 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 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 V1 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 S Process 2 3. 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 answers to the nearest dollar. 1 Process 1 Process 2

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