The magnitude of operating leverage for Perkins Corporation is 3.4 when sales are $100,000, if sales increase to $110,000, profits would be expected to increase by what percent?
To calculate the percent increase in profits, we need to understand the concept of operating leverage. Operating leverage measures the sensitivity of a company's profits to changes in its sales revenue.
The formula for operating leverage is:
Operating Leverage = Contribution Margin / Operating Income
Where:
- Contribution Margin is the ratio of contribution (sales revenue minus variable costs) to sales revenue.
- Operating Income is the net income generated from normal business operations.
In this case, the magnitude of operating leverage is given as 3.4 when sales are $100,000. To determine the percent increase in profits when sales increase to $110,000, we can follow these steps:
Step 1: Calculate the current Contribution Margin.
To find the current Contribution Margin, we use the operating leverage formula:
3.4 = Contribution Margin / Operating Income
We know that sales revenue is $100,000, but we don't have the exact values for Contribution Margin and Operating Income. Therefore, we can't calculate the Contribution Margin directly.
Step 2: Find the new Contribution Margin.
Since sales have increased to $110,000, we need to determine the new Contribution Margin.
To do this, we use the operating leverage formula with the new sales value:
3.4 = New Contribution Margin / Operating Income
Here, we know that the new sales revenue is $110,000, but we still don't have the exact values for New Contribution Margin and Operating Income.
Step 3: Calculate the percent increase in profits.
To determine the percent increase in profits, we compare the difference in profits between the new and current scenarios.
We can use the formula:
Percent Increase in Profits = (New Profits - Current Profits) / Current Profits * 100
However, to calculate the actual values, we need more information about the expense structure, fixed costs, and tax rates for Perkins Corporation. Without those details, it is not possible to provide an accurate percent increase in profits.
Therefore, the calculation of the percent increase in profits cannot be determined without further information.