Monroe Corporation currently sells 150,000 units a year at a price of $4.00 a unit.Its variable costs are approximately 40.0% of sales,and its fixed 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 Monroe's degree of operating leverage in sales dollars?
A) 4.8000
B) 6.3000
C) 7.3200
D) 5.6400
E) 6.0000

Question

Quizplus · Accepted Answer

The degree of operating leverage (DOL) is calculated as: DOL = 1 + (Fixed Costs / Operating Income). First, calculate the revenues: 150,000 units * $4.00 = $600,000. Variable costs are 40% of sales, so $600,000 * 0.40 = $240,000. Fixed costs are 50% of revenues, so $600,000 * 0.50 = $300,000. Operating income is revenues - variable costs - fixed costs = $600,000 - $240,000 - $300,000 = $60,000. DOL = 1 + ($300,000 / $60,000) = 6.0.

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