Fost Corporation's contribution margin ratio is 20%. If the degree of operating leverage is 15 at the $225,000 sales level, net operating income at the $225,000 sales level must equal:
A)$2,250
B)$6,750
C)$3,000
D)$5,063

Question

Quizplus · Accepted Answer

To calculate the net operating income (NOI), we need to use the formula:
NOI = (contribution margin ratio × sales) - fixed costs

We are given that the contribution margin ratio is 20%, and the sales level is $225,000. Therefore, the contribution margin is:

Contribution margin = 20% × $225,000 = $45,000

We are also given that the degree of operating leverage (DOL) is 15.

DOL = contribution margin ÷ net operating income

Rearranging that formula, we get:

Net operating income = contribution margin ÷ DOL

Substituting the values, we get:

Net operating income = $45,000 ÷ 15 = $3,000

Therefore, the net operating income at the $225,000 sales level must equal $3,000. Hence, the correct answer is C) $3,000.

Fost Corporation's Contribution Margin Ratio Is 20