ACTG 2P12 Chapter Notes - Chapter 15: Operating Leverage, Fixed Cost, Earnings Before Interest And Taxes

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Degree of operating leverage (dol): cm / operating income (in textbook**) % change net income = dol * change sales. You have been offered the job of managing one of the following two divisions, there is no salary attached to this position. Your compensation is a 50-50 split of any changes in net income with the upper management. 6 * 100% = 600% = ,000 change. In the month after you began to manage your division, a recession hit and sales declined to ,000. The contribution format income statements below are from the beginning of the month when you took over. Using them and your knowledge of cost behavior and degree of operating leverage, prepare new contribution format income statement assuming that sales have declined to ,000. Variable and cm will decrease by 20%, but fc don"t change (4000 10000 / 2) (6 * 20% = 120%*10,000 = Fc > vc, we gave a higher degree of operating leverage.

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