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
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?
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