Artem CPA Accounting LLP provides standard financial statement review services for clients at a price of $25,000. Artem has variable costs of $13,000 per review and fixed costs of $120,000 per month. Last month, Artem had an operating profit of $36,000. Which of the following statements is correct?

Question

Quizplus · Accepted Answer

We can start by adding operating profit of $36,000 to fixed costs of $120,000 to arrive at operating income of $156,000 for the month. Dividing this amount by the contribution margin of $12,000 ($25,000 sales - $13,000 variable expenses) yields the number of audits performed: $156,000 ÷ $12,000 = 13. The degree of operating leverage (DOL) is calculated as contribution margin divided by operating income. Therefore, DOL is equal to contribution margin of $156,000 ÷ $36,000 = 4.33.

Artem CPA Accounting LLP Provides Standard Financial Statement Review Services