A manufacturer of cedar shingles has supplied the following data: The company's degree of operating leverage is closest to:

Question

A manufacturer of cedar shingles has supplied the following data:  The company's degree of operating leverage is closest to:

Quizplus · Accepted Answer

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

% Change in sales = ($300,000 - $200,000) / $200,000 = 50%
% Change in operating income = ($90,000 - $30,000) / $30,000 = 200%

DOL = 200% / 50% = 4

To calculate the DOL using the given data, we need to calculate the contribution margin and the operating income. The contribution margin can be calculated as follows:

Contribution margin = Sales - Variable costs
= $300,000 - $150,000 - $50,000 - $10,000
= $90,000

Operating income can be calculated as follows:

Operating income = Sales - Variable costs - Fixed costs
= $300,000 - $150,000 - $50,000 - $60,000
= $40,000

DOL = Contribution margin / Operating income
= $90,000 / $40,000
= 2.25

Therefore, the closest answer choice is B) 25.88. We can calculate the DOL percentage by multiplying the DOL value by 100 which is 225%.

A Manufacturer of Cedar Shingles Has Supplied the Following Data