The accounting staff of LaForge Enterprises has computed a degree of operating leverage (DOL) of 3.5 for last month's results based on revenues of $5,500 and variable costs of $2,000. What were total fixed costs?
A) $950
B) $1,000
C) $2,300
D) $2,500

Question

Quizplus · Accepted Answer

The DOL is calculated as contribution margin (revenues minus variable costs) divided by operating income. Therefore, a DOL of 3.5 = (5,500 F1F1F1S1?F1F1F10 2,000) ÷ operating income, which can be calculated as 3500 ÷ 3.5 = 1,000. For Operating income to be $1,000 based on a Contribution Margin of $3,500, Fixed Costs would have to be $3,500 F1F1F1S1?F1F1F10 $1,000 = $2,500.

The Accounting Staff of LaForge Enterprises Has Computed a Degree