Marcus Corporation currently sells 150,000 units a year at a price of $4.00 a unit.Its variable costs are approximately 30% of sales,and its fixed operating costs amount to 50% of revenues at its current output level.Although fixed costs are based on revenues at the current output level,the cost level is fixed.What is Marcus' degree of operating leverage in sales dollars?
A) 1.0
B) 2.2
C) 3.5
D) 4.0
E) 5.0

Question

Quizplus · Accepted Answer

Degree of operating leverage (DOL) = Contribution Margin / Net Operating Income

Contribution Margin = Sales - Variable Costs = $4.00/unit * 150,000 units * 0.70 = $420,000

Net Operating Income = (Sales - Variable Costs) - Fixed Operating Costs = ($4.00 * 150,000 * 0.70) - ($4.00 * 150,000 * 0.50) = $180,000

DOL = $420,000 / $180,000 = 2.33

Since we are looking for DOL in sales dollars, we can multiply the DOL by the current sales level:

Sales in dollars = $4.00/unit * 150,000 units = $600,000

DOL in sales dollars = $600,000 * 2.33 = $1,398,000

Therefore, the best choice is C, with a DOL of 3.5 in sales dollars.

Marcus Corporation Currently Sells 150,000 Units a Year at a Price