Quineboag Textiles Inc.has calculated its degree of operating leverage at 3.00.If Quineboag can increase sales from $5,000,000 to $5,250,000, operating income should increase from $500,000 to -.
A)$515,000
B)$650,000
C)$1,500,000
D)$575,000

Question

Quizplus · Accepted Answer

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

Therefore, % change in operating income = DOL × % change in sales

In this scenario, DOL = 3.00 and % change in sales = 5%

So, % change in operating income = 3.00 × 5% = 15%

Therefore, the increase in operating income = $500,000 × 15% = $75,000

So, the new operating income should be $500,000 + $75,000 = $575,000.

Hence, the correct answer is option D.