Gardner Furniture Co.has calculated its degree of operating leverage as 3.5.If Gardner can increase sales revenue by 5%,net operating income should increase by
A)15%.
B)17.5%.
C)1.43%.
D)3.5%.

Question

Quizplus · Accepted Answer

Degree of operating leverage (DOL) = % change in operating income / % change in sales
3.5 = % change in operating income / 5%
% change in operating income = 17.5%
Therefore, if Gardner increases sales revenue by 5%, its net operating income should increase by 17.5%. The correct answer is B.