Asked by Rogelio De Santiago on May 07, 2024
Verified
The February contribution format income statement of Mcabier Corporation appears below: The degree of operating leverage is closest to:
A) 0.27
B) 6.79
C) 3.70
D) 0.15
Degree Of Operating Leverage
A financial metric that measures the sensitivity of a company's operating income to its sales. Higher leverage indicates that a small change in sales can lead to a large change in operating income.
Contribution Format
A method of income statement presentation that separates variable costs from fixed costs, highlighting the contribution margin.
- Evaluate the magnitude of operating leverage utilizing the financial income statements of a company.
Verified Answer
DOL = Contribution Margin / Operating Income
First, we need to calculate the contribution margin for Mcabier Corporation:
Contribution Margin = Total Sales - Variable Expenses
= $1,580,000 - ($307,000 + $745,000)
= $528,000
Next, we need to calculate the operating income:
Operating Income = Gross Profit - Operating Expenses
= ($1,580,000 - $1,052,000) - $216,000
= $312,000
Now, we can calculate the DOL:
DOL = Contribution Margin / Operating Income
= $528,000 / $312,000
= 1.69
Therefore, the closest answer choice is C) 3.70.
Learning Objectives
- Evaluate the magnitude of operating leverage utilizing the financial income statements of a company.
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