Vince Corporation's variable expenses are 60% of sales. At a $200,000 sales level, the degree of operating leverage is 5. If sales increased by $20,000, the new degree of operating leverage will be (rounded):

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Quizplus · Accepted Answer

(0.4 x $200,000) / 5 = $16,000 before-tax profits (BTP)
Increase in Sales: $20,000 / $200,000 = 0.10 = 10%
Increase in BTP = 10% x 5 (degree of operating leverage) = 50% x $16,000 = $8,000
New BTP = $16,000 + $8,000 = $24,000
New degree of operating leverage = (0.4 x $220,000) / $24,000 = 3.67

Vince Corporation's Variable Expenses Are 60% of Sales