Trident Food Corporation generated the following income statement for the most recent fiscal year: $$\begin{array} { l c }
\text { Sales revenues } & \$ 150,000 \
\text { Variable cost of sales } & \frac { ( 112,500 ) } { 37,500 } \
\text { Gross profit } & \frac { ( 24,000 ) } { 13,500 } \
\text { Fixed operating costs } & \frac { ( 10,000 ) } { 3,500 } \
\text { Net operating income (EBIT) } & \underline { ( 1,400 ) } \
\text { Interest } & \frac { 2,100 } { \text { Earnings before taxes } }
\end{array}$$
What is the degree of operating leverage for Trident Food?

Question

Trident Food Corporation generated the following income statement for the most recent fiscal year: $$\begin{array} { l c } 
\text { Sales revenues } & \$ 150,000 \
\text { Variable cost of sales } & \frac { ( 112,500 ) } { 37,500 } \
\text { Gross profit } & \frac { ( 24,000 ) } { 13,500 } \
\text { Fixed operating costs } & \frac { ( 10,000 ) } { 3,500 } \
\text { Net operating income (EBIT) } & \underline { ( 1,400 ) } \
\text { Interest } & \frac { 2,100 } { \text { Earnings before taxes } }
\end{array}$$
What is the degree of operating leverage for Trident Food?

Quizplus · Accepted Answer

The degree of operating leverage is calculated as the percentage change in EBIT divided by the percentage change in sales. In this case, the percentage change in EBIT is (3,500 - 1,400) / 1,400 = 157.14%. The percentage change in sales is (150,000 - 112,500) / 112,500 = 33.33%. Therefore, the degree of operating leverage is 157.14% / 33.33% = 4.71×.

Trident Food Corporation Generated the Following Income Statement for the Most