Iverson Corporation's variable expenses are 60% of sales. At a $400,000 sales level, the degree of operating leverage is 5. If sales increase by $40,000, the new degree of operating leverage will be (rounded):
A) 3.67
B) 2.86
C) 5.25
D) 5.00

Question

Quizplus · Accepted Answer

The degree of operating leverage (DOL) is calculated as Contribution Margin / Net Operating Income. Initially, Contribution Margin = 40% of $400,000 = $160,000, and Net Operating Income = $160,000 / 5 = $32,000. With a $40,000 sales increase, Contribution Margin increases by $16,000 to $176,000, and Net Operating Income becomes $48,000. New DOL = $176,000 / $48,000 = 3.67.

Iverson Corporation's Variable Expenses Are 60% of Sales