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Mercantile Corporation has sales of $2,000,000, variable costs of $800,000, and fixed costs of $900,000.
-Mercantile's degree of operating leverage is
A) 1.33.
B) 1.67.
C) 1.50.
D) 4.00.

Question

Use the following information for questions 
Mercantile Corporation has sales of $2,000,000, variable costs of $800,000, and fixed costs of $900,000.
-Mercantile's degree of operating leverage is
A) 1.33.
B) 1.67.
C) 1.50.
D) 4.00.

Quizplus · Accepted Answer

The degree of operating leverage (DOL) is calculated as: DOL = Contribution Margin / Operating Income. Contribution Margin = Sales - Variable Costs = $2,000,000 - $800,000 = $1,200,000. Operating Income = Contribution Margin - Fixed Costs = $1,200,000 - $900,000 = $300,000. Therefore, DOL = $1,200,000 / $300,000 = 4.00.

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