A company that makes organic fertilizer has supplied the following data: The company's degree of operating leverage is closest to:
A)1.97
B)15.54
C)1.25
D)7.48

Question

A company that makes organic fertilizer has supplied the following data:  The company's degree of operating leverage is closest to:
A)1.97 
B)15.54 
C)1.25 
D)7.48

Quizplus · Accepted Answer

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

Contribution Margin = Total Sales - Variable Costs
Net Operating Income = Total Sales - Variable Costs - Fixed Costs

Using the data provided:

Contribution Margin = $270,000 - $118,000 = $152,000
Net Operating Income = $270,000 - $118,000 - $60,000 = $92,000

DOL = $152,000/$92,000 = 1.65

Therefore, the closest choice is D) 7.48.

A Company That Makes Organic Fertilizer Has Supplied the Following