Answer the following statements true (T) or false (F)
1. Operating leverage predicts the effects fixed costs have on operating income when sales volume
changes.
2. The degree of operating leverage for Madrigal Company is 2. The actual operating income is
$14,000. If the company expects a 25% increase in sales, operating income should increase by $3,500.
3. The sales mix provides the weights that make up total product sales.
4. Sales mix, or product mix, is the combination of products that make up total sales.
5. Barnes Company sells two products, X and Y. For the coming year, Barnes predicts sales of 5,000
units of X and 10,000 units of Y. The contribution margins per unit of products X and Y are $5 and $4,
respectively. The weighted-average contribution margin is $6.50 per unit.
1. TRUE
2. FALSE
The percentage change in operating income will be 2 times the percentage change in sales.
Thus operating income will increase by $14,000 × 50% or $7,000.
3. TRUE
4. TRUE
5. FALSE
Sales mix = 5,000:10,000 = 1:2
Total contribution per unit of the X and Y = ($5 × 1) + ($4 × 2) = $13
Weighted-average contribution margin per unit = $13 per unit / 3 units = $4.33
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