COST – VOLUME – PROFIT

RELATIONSHIP

CLEI UBANDO
OPERATING LEVERAGE
In Physics, it refers to a small tool used to move a bigger object. In
Accounting, the operating leverage of Profit is the Contribution Margin.

DEGREE OF OPERATING LEVERAGE (DOL)

It signifies the percentage change in Net Operating Income given a
change in sales.

𝐶𝑜𝑛𝑡𝑟𝑖𝑏𝑢𝑡𝑖𝑜𝑛 𝑀𝑎𝑟𝑔𝑖𝑛
𝐷𝑂𝐿 =
𝑁𝑒𝑡 𝑂𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝐼𝑛𝑐𝑜𝑚𝑒
DEGREE OF OPERATING LEVERAGE

OTTO SHOES (SNEAKERS)

Unit Price Php 500.00
Units Sold 120 Pairs
Unit Variable Cost Php 75.00
Total Fixed Cost Php 20,000.00

OTTO SHOES (SNEAKERS)

Sales ( 500 x 120) Php 60,000.00
Variable Cost (75 x 120) Php 5,000.00
Contribution Margin Php 55,000.00
Fixed Cost Php 20,000.00
Net Operating Income Php 35,000.00
WHAT WILL HAPPEN?
DOL = Contribution Margin / Net Operating Income
= 55,000 / 35,000
= 1. 6

SALES CHANGE IN DEGREE OF OPERATING PERCENTAGE CHANGE IN PESO CHANGE

SALES LEVERAGE NET OPERATING INCOME
(A) (B) (A X B)

Php 60,000.00 20% 1.6 32% PHP 19, 200.00

SALES MIX AND BREAK - EVEN ANALYSIS
OTTO SHOES (SNEAKERS)
Unit Price Php 640.00
Units Sold 125 Pairs
Unit Variable Cost Php 320.00

OTTO SHOES (SANDALS)

Unit Price Php 200.00
Units Sold 100 Pairs
Unit Variable Cost Php 150.00

Fixed Cost Php 27,000.00

 OTTO SHOES010 COMPUTATION SNEAKERS SANDALS TOTAL

640 x 125 pairs (Sneakers)

Sales 400 x 100 pairs (Sandals) (80%) 80,000 (20%) 20,000 (100%) 100,000

320 x 125 pairs (Sneakers)

Variable Expenses 150 x 100 pairs (Sandals) (50%) 40,000 (75%) 15,000 (55%) 55,000

Contribution 60,000 – 9,000 (Sneakers)

Margin 40,000 – 10,000 (Sandals) (50%) 40,000 (25%) 15,000 (45%) 45,000

Fixed Expenses 27,000

Net Operating
Income Php 18,000
 Break - Even Point = Fixed Expenses / Overall CM Ratio
= 27,000 / 0.45
= 60,000.00

Sales at Break – Even Point

Sneakers 60,000 x 0.80 = 48,000.00

Sandals 60,000 x 0.20 = 12,000.00

OTTO SHOES SNEAKERS SANDALS TOTAL

Sales 48,000.00 12,000.00 60,000.00

Variable Expenses (50%) 24,000 (75%) 9,000 33,000

Contribution Margin 24,000 3,000 27,000

Fixed Expenses 27,000

Net Operating Income 0

TRY SOLVING THIS
KG Company manufactures and sells a single product. The company’s sales and expenses for the
month of August 2018 is shown below.

Total Per Unit

Sales 600,000 40.00
Variable Expenses 420,000 28
Contribution Margin 180,000 12
Fixed Expenses 150,000
Net Operating Income 30,000

1. Get the Degree of Operating Leverage

2. Break – Even Point
3. How much is the Fixed Expense at the Break Even Point?
4. What is the Contribution Margin at Break Even Point.