Marcus Corporation currently sells 150,000 units a year at a price of $4.00 a unit. Its variable costs are approximately 30% of sales, and its fixed operating costs amount to 50% of revenues at its current output level. Although fixed costs are based on revenues at the current output level, the cost level is fixed. Which of the following is Marcus's degree of operating leverage (DOL) at sales equal to 150,000 units?

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The degree of operating leverage (DOL) is calculated as 1 + (Fixed Costs / Operating Income). First, calculate the revenues (150,000 units * $4.00 = $600,000). Variable costs are 30% of sales, so they are $180,000. Fixed costs are 50% of revenues, so they are $300,000. Operating income is revenues minus variable and fixed costs: $600,000 - $180,000 - $300,000 = $120,000. DOL = 1 + ($300,000 / $120,000) = 3.5.

Marcus Corporation Currently Sells 150,000 Units a Year at a Price