Stromburg Corporation makes surveillance equipment for intelligence organizations.Its sales are $75,000,000.Fixed costs,including research and development,are $40,000,000,while variable costs amount to 30% of sales.Stromburg plans an expansion which will generate additional fixed costs of $15,000,000,decrease variable costs to 25% of sales,and also permit sales to increase to $100,000,000.What is Stromburg's degree of operating leverage at the new projected sales level?
A)3.7500
B)3.9375
C)4.1344
D)4.3411
E)4.5581

Question

Quizplus · Accepted Answer

Degree of operating leverage = (Contribution margin / Net operating income)= (Sales - Variable costs - Fixed costs) / (Sales - Variable costs)= (100,000,000 - 0.25 * 100,000,000 - 55,000,000) / (100,000,000 - 0.25 * 100,000,000)= 3.75

Stromburg Corporation Makes Surveillance Equipment for Intelligence Organizations