Marcus Corporation currently sells 150,000 units per year at a price of $4.00 a unit. Its variable costs are 30 percent of sales, and its fixed operating costs are $300,000. What is Marcus's degree of operating leverage (DOL) at sales equal to 150,000 units?
A)1.4×
B)2.2×
C)3.5×
D)2.0×
E)5.0×

Question

Quizplus · Accepted Answer

First, let's calculate the contribution margin per unit:
Price per unit - Variable cost per unit = Contribution margin per unit

$4.00 - ($4.00 x 0.30) = $2.80

Next, let's calculate the total contribution margin:
Contribution margin per unit x Units sold = Total contribution margin
$2.80 x 150,000 = $420,000

Now, let's calculate the operating income:
Total contribution margin - Fixed operating costs = Operating income
$420,000 - $300,000 = $120,000

The degree of operating leverage (DOL) can now be calculated:
DOL = Total contribution margin / Operating income

DOL = $420,000 / $120,000 = 3.5x

Therefore, the best choice is C.

Marcus Corporation Currently Sells 150,000 Units Per Year at a Price