Figure 4-6. Shorter Company had originally expected to earn operating income of $130,000 in the coming year.Shorter's degree of operating leverage is 2.4.Recently,Shorter revised its plans and now expects to increase sales by 20% next year.
Refer to Figure 4-6.What is Shorter's revised expected operating income for the coming year?

Question

Quizplus · Accepted Answer

The degree of operating leverage (DOL) indicates how a percentage change in sales will affect operating income. With a DOL of 2.4 and a 20% increase in sales, the operating income will increase by 2.4 * 20% = 48%. Therefore, the revised operating income is $130,000 * (1 + 0.48) = $192,400.