Charlestown Marina's forecasts indicate that if slip rentals equal $500,000, net operating income will be $25,000 and if rentals equal $525,000, net operating income will be $37,500. What is Charletown's degree of operating leverage?
A) 2
B) 10
C) .05
D) .10

Question

Quizplus · Accepted Answer

Degree of operating leverage (DOL) = % change in net operating income / % change in sales

Using the given figures, we can calculate the % change in net operating income and sales as:

% change in NOI = (37500 - 25000) / 25000 = 0.5

% change in sales = (525000 - 500000) / 500000 = 0.05

Plugging these values into the DOL formula:

DOL = 0.5 / 0.05 = 10

Therefore, the degree of operating leverage is 10. Choice B is correct.

Charlestown Marina's Forecasts Indicate That If Slip Rentals Equal $500,000