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Roxbury Manufacturing Company - Assignment Example

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The degree of leverage (DOL) refers to the multiple by which a company’s operating income changes due to a certain percentage change in the level of its sales. In case the firm’s operating income exhibits a higher response to changes in its sales, then it has a high operating leverage…
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Roxbury Manufacturing Company
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Download file to see previous pages Calculating the DOL for 2011 and 2012 to explain the 20% decline in profit from a 10% decline in sales; The DOL is calculated as follows; Degree of Leverage (DOL) = Contribution Margin/ Operating Income Assume that the first year is (2011); The DOL for 2011 = Contribution Margin/ Operating Income = [1,000, 000/500,000] = 2 In response to a 10% decline in sales, the operating income (profit) will decline by; 2*10% = 20% in 2011. Assume that the first year is (2012); The DOL for 2012 = Contribution Margin/ Operating Income = [900,000/ 400,000] = 2.25 In response to a 10% decline in sales, the operating income (profit) will decline by; 2.25*10% = 22.5% in 2012. Now, assuming the following changes happen; - Sales decline again by 10% The sales for the year 2013 would be; [90/100*$ 3,600,000] = $ 3,240,000 - By cutting wastage, costs can be reduced by $120,000 The variable expenses for the year 2013 would be; [$ 2,700,000 - $120,000] = $2,580,000 The Revised Income Statement, if the above changes are made will appear as shown below: ...Download file to see next pagesRead More
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