What is the degree of operating leverage? Sales = 100,000 units; price = $50; variable cost = $30; ﬁxed costs = $950,000; depreciation = $250,000; tax rate = 34%.
A) 1.06
B) 1.22
C) 1.37
D) 1.63
E) 2.22

Question

Quizplus · Accepted Answer

The degree of operating leverage (DOL) is calculated as: DOL = 1 + (Fixed Costs + Depreciation) / (Sales - Variable Costs - Fixed Costs - Depreciation). Here, Sales = 100,000 * $50 = $5,000,000; Variable Costs = 100,000 * $30 = $3,000,000; Fixed Costs = $950,000; Depreciation = $250,000. Contribution Margin = Sales - Variable Costs = $2,000,000. Operating Income = Contribution Margin - Fixed Costs - Depreciation = $800,000. DOL = 1 + ($950,000 + $250,000) / $800,000 = 2.22.

What Is the Degree of Operating Leverage? Sales = 100,000