A company that makes organic fertilizer has supplied the following data: The company's degree of operating leverage is closest to:

Question

A company that makes organic fertilizer has supplied the following data:  The company's degree of operating leverage is closest to:

Quizplus · Accepted Answer

Degree of Operating Leverage = % Change in Operating Income / % Change in Sales

Using the given data, we can calculate the degree of operating leverage as follows:

Sales at 9,000 units = $720,000 
Sales at 10,000 units = $800,000

% Change in Sales = [(New Sales - Old Sales) / Old Sales] x 100% 
% Change in Sales = [(800,000 - 720,000) / 720,000] x 100% 
% Change in Sales = 11.11%

Operating Income at 9,000 units = $32,000 
Operating Income at 10,000 units = $96,000

% Change in Operating Income = [(New Operating Income - Old Operating Income) / Old Operating Income] x 100% 
% Change in Operating Income = [(96,000 - 32,000) / 32,000] x 100% 
% Change in Operating Income = 200%

Degree of Operating Leverage = % Change in Operating Income / % Change in Sales 
Degree of Operating Leverage = 200% / 11.11% 
Degree of Operating Leverage = 18

Therefore, the closest choice is D) 7.48.

A Company That Makes Organic Fertilizer Has Supplied the Following