Donatello's Donut Shop sells boxes of a dozen donuts for $9, has variable costs of $5 per box and has fixed costs of $8,000 per month. Last month, Donatello's had an operating profit of $2,000. Which of the following statements is correct?
A) If Donatello's had sold 2,500 boxes last month, it would have hit the break-even point.
B) If Donatello's sold 3,000 boxes last month, its operating profit would have been $3,000.
C) If Donatello's has an increase in sales of 10%, it can expect operating profit of $2,500.
D) If Donatello's has an increase in sales of 5%, it can expect operating profit of $2,500.

Question

Quizplus · Accepted Answer

The degree of operating leverage (DOL) is calculated as contribution margin divided by operating income. If operating profit was $2,000 and fixed costs were $8,000, then contribution margin was equal to $10,000 last month. This means that the degree of operating leverage (DOL) for Donatello was its contribution margin of $10,000 ÷ operating income of $2,000 = 5.0. Operating income can be predicted based on a given sales revenue increase. In this case, 5% times the degree of operating leverage of 5.0 equalsa 25% increase in expected operating profit, or $2,000 × 1.25 = $2,500.

Donatello's Donut Shop Sells Boxes of a Dozen Donuts for $9