The degree of operating leverage is closest to:A) 0.11B) 9.37C) 0.27D) 3.66

Question

Brody Peacock · Accepted Answer

Final Answer : D, Explanation :  The degree of operating leverage (DOL) is calculated as the percentage change in operating income divided by the percentage change in sales. If we have the following information:Sales = $1,000,000Variable costs = $600,000Fixed costs = $200,000Operating income = $200,000Then the DOL can be calculated as follows:DOL = (% change in operating income) / (% change in sales)% change in operating income = (operating income at new sales level - operating income at original sales level) / (operating income at original sales level)% change in operating income = [($1,500,000 - $200,000) - ($1,000,000 - $200,000)] / ($1,000,000 - $200,000)% change in operating income = ($1,300,000 - $800,000) / $800,000% change in operating income = 0.625% change in sales = ($1,500,000 - $1,000,000) / $1,000,000% change in sales = 0.5DOL = 0.625 / 0.5DOL = 1.25 / 1DOL = 1.25Therefore, the degree of operating leverage is 1.25, which is closest to D)3.66. Degree of operating leverage = Contribution margin ÷ Net operating income= $166,400 ÷ $45,500 = 3.66

The degree of operating leverage is closest to:

A) 0.11
B) 9.37
C) 0.27
D) 3.66

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