Larimore Company sales are $560,000. The company has variable costs equal to 40% of sales and total fixed costs of $150,000.Required:1) What is the company's break-even point in sales dollars?2) Compute the company's operating leverage at its current sales level.3) Compute the percentage change in income that will accompany a 10% increase in sales.
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1) Break-even point in sales dollars = $150,000 ÷ (100% - 40%) = $250,000
2) Operating leverage = contribution margin ÷ income.
Contribution margin = $560,000 × .6 = $336,000; net income = $336,000 - $150,000 = $186,000;
Operating leverage = $336,000 ÷ $186,000 = 1.81 (rounded)
3) Percentage change in income accompanying a 10% increase in sales = 10% × 1.81 = 18.1%
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