A manufacturer of tiling grout has supplied the following data:
-The company's degree of operating leverage is closest to:

Question

A manufacturer of tiling grout has supplied the following data: 
-The company's degree of operating leverage is closest to:

Quizplus · Accepted Answer

Degree of Operating Leverage (DOL) = (% Change in EBIT) / (% Change in Sales)
DOL = (40% / 20%) = 2
Contribution margin ratio = (Sales - Variable Costs) / Sales = 60% / 100% = 0.6
Therefore, DOL = 1 + (Contribution margin ratio / Fixed costs)
2 = 1 + (0.6 / Fixed costs) 
Fixed costs = $0.4 million
DOL = 1 + (0.6 / 0.4) = 2.5
The closest answer option is C) 4.00.

A Manufacturer of Tiling Grout Has Supplied the Following Data