A firm has fixed operating costs of $175,000, total sales revenue of $3,000,000 and total variable costs of $2,250,000. The firm's degree of operating leverage is ________.
A) 0.77
B) 1.30
C) 0.81
D) 4.29

Question

Quizplus · Accepted Answer

The degree of operating leverage (DOL) is calculated as: DOL = [Q(P-V)] / [Q(P-V) - F], where Q is the quantity sold, P is the price per unit, V is the variable cost per unit, and F is the fixed cost. However, when total values are given instead of per unit values, the formula simplifies to: DOL = (Sales - Variable Costs) / (Sales - Variable Costs - Fixed Costs) = Contribution Margin / Operating Income. Plugging in the given values: DOL = ($3,000,000 - $2,250,000) / ($3,000,000 - $2,250,000 - $175,000) = $750,000 / $575,000 = 1.30.

A Firm Has Fixed Operating Costs of $175,000, Total Sales