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 costs of $13,000; and operating income of $7,000 for year one, and sales of $40,000; variable cost $15,000; and operating income of $16,000 for year 2. Your answer should be rounded to two decimal places. (For this problem, specifically calculate the difference between the sales and the operating income for each of the given years. This will allow you to calculate the degree of operating leverage.) Please write out the problem, so that I can understand it. Do not use excel. Thanks

Explanation / Answer

Year 1 Year 2 Sales 25,000 40,000 Variable costs 13,000 15,000 Contribution margin 12,000 25,000 Fixed operating cost 5,000 9,000 Operating income (EBIT) 7,000 16,000 Operating leverage ( Contribution Margin / Operating Income) 1.7143 1.5625

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