Asked by Benoit BOUDA on Jun 29, 2024
Verified
Alpha Corporation reported the following data for its most recent year: sales, $1,000,000; variable expenses, $600,000; and fixed expenses, $300,000.The company's degree of operating leverage is closest to:
A) 0.25
B) 2.0
C) 4.0
D) 3.3
Degree of Operating Leverage
A financial ratio that measures the sensitivity of a company's operating income to its sales, indicating how revenue growth translates into growth in operating income.
Variable Expenses
Costs that change in proportion to the level of business activity or production volume.
Fixed Expenses
Costs that do not fluctuate with changes in production level or sales volume, remaining constant over a period.
- Apprehend and assess the extent of operating leverage and its impact on net operating income.
Verified Answer
Contribution Margin = Sales - Variable Expenses
Contribution Margin = $1,000,000 - $600,000 = $400,000
Net Operating Income = Sales - Variable Expenses - Fixed Expenses
Net Operating Income = $1,000,000 - $600,000 - $300,000 = $100,000
DOL = $400,000 / $100,000 = 4.0
Therefore, the company's degree of operating leverage is 4.0.
= $1,000,000 - $600,000 = $400,000
Profit = Contribution margin - Fixed expenses
= $400,000 - $300,000 = $100,000
Degree of operating leverage = Contribution margin ÷ Net operating income
= $400,000 ÷ $100,000 = 4
Learning Objectives
- Apprehend and assess the extent of operating leverage and its impact on net operating income.
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