Iverson Company's variable expenses are 60% of sales. At a £400,000 sales level, the degree of operating leverage is 5. If sales increase by £40,000, the new degree of operating leverage will be (rounded)

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The degree of operating leverage (DOL) is calculated as Contribution Margin / Net Operating Income. Initially, Contribution Margin = 40% of £400,000 = £160,000, and Net Operating Income = £160,000 / 5 = £32,000. With a £40,000 sales increase, new sales = £440,000, Contribution Margin = 40% of £440,000 = £176,000, and new Net Operating Income = £32,000 + (£16,000 increase in CM) = £48,000. New DOL = £176,000 / £48,000 = 3.67.

Iverson Company's Variable Expenses Are 60% of Sales