Eugene's Environmental Consulting Service LLP had the following operating results last month: Service revenues amounted to $25,000, variable costs were $12,000, and fixed costs were $10,000 for the month. Eugene's anticipates a 5% increase in service revenues next month and expects its cost structure to remain constant. Based on this information, which of the following statements is correct?
A) Contribution margin last month was $10,000.
B) Total operating profit next month will be $3,650.
C) Operating profit last month amounted to a total of $4,500.
D) Eugene's had a degree of operating leverage of 4.0 last month.

Question

Quizplus · Accepted Answer

Service revenues of $25,000 less variable costs of $12,000 results in a contribution margin of $13,000. A contribution margin of $13,000 minus$10,000 of fixed costs is equal to operating profit of $3,000 last month. Degree of operating leverage (DOL) is equal to a contribution margin of $13,000divided by operating income of $3,000, or 4.33. The DOL of 4.33 then needs to be multiplied by the 5% sales increase, which comes to 0.2165. Adding 1 tothis factor gives an amount of 1.2165, and multiplying this by last month's operating income of $3,000 yields an amount of $3,649.50, or $3,650 rounded,as the anticipated operating income next month.

Eugene's Environmental Consulting Service LLP Had the Following Operating Results