28. Green Company\'s variable expenses are 75% of sales. At a sales level of $40

Question

28. Green Company's variable expenses are 75% of sales. At a sales level of $400,000, the company's degree of operating leverage is 8. At this sales level, fixed expenses are:
A. $87,500
B. $100,000
C. $50,000
D. $75,000

My professor actually marked answer as D. I don't think he is right and have to prove him wrong..

I got A as an answer instead. Here is what I did.

VC= 400,000 x 75% = 300,000   so Sales-VC = 100,000 = Contribution Margin

8 = CM / net income    8 x net income = 100,000 so net income is 12,500

CM - FC = 12500 then. That is 100,000 - 12500 = FC  = 87,500

So I don't think it's D. Please help !

Explanation / Answer

Degree of operating leverage = % change in EBIT / % change in Sales In the above case DOL is 8 and Net Income (Contribution - Fixed cost) / Contribution 8 = Net income / 100,000 net income = 100,000 / 8 = 12,500 Fixed cost = 100,000 - 12,500 = 87,500 I hope the above is clear.

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