Reference no: EM13583062

Sharda company is considering two different processes to make its product - process 1 and process 2. Process 1 requires Sharda to manufacture subcomponents of the product in-house. As a result, materials are less expensive, but fixed overhead is higher. Process 2 involves purchasing all subcomponents from outside suppliers. The direct materials costs are higher, but fixed factory overhead is considerably lower. relevant data for a sales level of 30,000 units follow:

                                                                    process 1            process 2

sales                                                             $6,000,000          $6,000,000

variable expenses                                            2,700,000            4,200,000

contribution margin                                          3,300,000             1,800,000

less total fixed expenses                                   1,925,000             600,000

operating income                                              1,375,000            1,200,000

Unit selling price                                               200                      200

unit variable cost                                              90                       140

unit contribution margin                                      110                      60

Required:

1. compute the degree of operating leverage for each process.

2. suppose that sales are 30 percent higher than budgeted. by what percentage will operating income increase for each process? what will be the increase in operating income for each system? what will be the increase in operating income for each system? what will be the total operating income for each process?

3. what if unit sales are 10 percent lower than budgeted? by what percentage will operating income decrease fom each process? what will be the total operating income for each process?