Calculate the degree of operating leverage given the following information: sale

Question

Calculate the degree of operating leverage given the following information: sales of $25,000; variable coats of $13,000; and operating income of $7,000 for year one, and sales of $40,000; variable costs of $15,000; and operating income of $16,000 for year 2. Your answer should be rounded to two decimal places. Calculate the degree of operating leverage given the following information: sales of $25,000; variable coats of $13,000; and operating income of $7,000 for year one, and sales of $40,000; variable costs of $15,000; and operating income of $16,000 for year 2. Your answer should be rounded to two decimal places.

Explanation / Answer

Answer:

Degree of Operating Leverage (DOL) = COntribution / Operating Income or EBIT

DOL for year 1 = $12,000 / $7,000 = 1.71 times

DOL for year 2 = $25,000 / $16,000 = 1.56 times

Note: Calculation of Contribution Margin

Year 1 Year 2 Sales $25,000 $40,000 Less: Variable Cost ($13,000) ($15,000) Contribution Margin $12,000 $25,000 Less: Fixed Cost ($5,000) ($9,000) Operating Income $7,000 $16,000

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