Carver Packing Company reports total contribution margin of $72,000 and pretax net income of $24,000 for the current month. In the next month, the company expects sales volume to increase by 8%. The degree of operating leverage and the expected percent change in income, respectively, are:
A) 0.33 and 2.7%
B) 3.0 and 8%
C) 3.0 and 24%
D) 4.0 and 32%
E) 0.33 and 8%

Question

Quizplus · Accepted Answer

The degree of operating leverage (DOL) can be calculated using the formula:

DOL = contribution margin / pretax net income

Plugging in the given numbers, we get:

DOL = $72,000 / $24,000 
DOL = 3

The expected percent change in income can be calculated using the formula:

% change in income = DOL x % change in sales

Plugging in the given numbers, we get:

% change in income = 3 x 8% 
% change in income = 24%

Therefore, the answer is C, with a DOL of 3 and an expected percent change in income of 24%.

Carver Packing Company Reports Total Contribution Margin of $72,000 and Pretax