Brandi's Bakery's income statement for last month is given below.What is Brandi's degree of operating leverage?

Question

Quizplus · Accepted Answer

To calculate the degree of operating leverage, we need to use the formula:

Degree of Operating Leverage = % change in operating income / % change in sales

We don't have information about the % change in operating income or sales, but we can use the given income statement to calculate the operating income and sales for the month:

Operating income = Gross profit - Operating expenses 
Operating income = $7,500 - $2,500 = $5,000

Sales = Gross revenue 
Sales = $12,500

Using these values, we can calculate the degree of operating leverage:

Degree of Operating Leverage = (Sales - Variable costs - Fixed costs) / (Sales - Variable costs) / (Operating income / Sales)

Degree of Operating Leverage = (($12,500 - $5,000 - $2,500) / ($12,500 - $5,000)) / ($5,000 / $12,500)

Degree of Operating Leverage = (5,000 / 7,500) / (5,000 / 12,500)

Degree of Operating Leverage = 3.5

Therefore, the answer is C: 3.5.

Brandi's Bakery's Income Statement for Last Month Is Given Below