Bell Brothers has $3,000,000 in sales.Its fixed costs are estimated to be $100,000, and its variable costs are equal to fifty cents for every dollar of sales.The company has $1,000,000 in debt outstanding at a before-tax cost of 10 percent.If Bell Brothers' sales were to increase by 20 percent, how much of a percentage increase would you expect in the company's net income?
A)15.66%
B)18.33%
C)19.24%
D)21.50%
E)23.08%

Question

Quizplus · Accepted Answer

The percentage increase in net income is calculated using the degree of operating leverage (DOL) and the degree of financial leverage (DFL). The DOL is 2, and the DFL is 1.25. The overall leverage effect is 2.5, leading to a 23.08% increase in net income with a 20% increase in sales.

Bell Brothers Has $3,000,000 in Sales