Lincoln Lodging Inc.estimates that if its sales increase 10% then its net income will increase 15.00%.The company's EBIT equals $2.4 million,and its interest expense is $400,000.The company's operating costs include fixed and variable costs.What is the level of the company's fixed operating costs?
A) $720,000
B) $558,000
C) $624,000
D) $600,000
E) $534,000

Question

Quizplus · Accepted Answer

The degree of operating leverage (DOL) can be calculated using the formula: DOL = % change in EBIT / % change in sales. Given that a 10% increase in sales leads to a 15% increase in net income, and assuming no taxes or other changes, the DOL is 1.5. Using the formula EBIT = Sales - Variable Costs - Fixed Costs, and knowing EBIT is $2.4 million and interest is $400,000, we can solve for fixed costs. The correct fixed operating costs are $600,000.