Emanuel's Electronics Co. has the following results for the month: Revenues equal $6,500, contribution margin equals $3,900, and operating income equals $600. Revenues are expected to grow by 10% next month. Using the principle of degree of operating leverage (DOL) and based on the projected revenue increase, what can Emanuel's Electronics expect in operating income next month?
A) $900
B) $990
C) $1,500
D) $2,200

Question

Quizplus · Accepted Answer

The DOL is calculated as contribution margin divided by operating income, or $3,900 ÷ $600 = 6.5. The sales increase of 10% must be multiplied by the DOL of 6.5 to get the multiplier to apply to operating income expected under 10% sales growth. That means operating income must be multiplied by 1.65 to arrive at expected operating income under the new revenue assumption. New operating income = $600 × $1.65 = $990.