Question

bristo corporation has sales of 1,000 units at $50 per unit. variable expenses are 40% of the selling price. if total fixed expenses are $20,000, the degree of operating leverage is:

Answer 1

The degree of operating leverage is 3 times

The degree of operating leverage calculates how much a company's operating income changes in respect  to a change in sales. The DOL ratio analysts in determining the impact of any change in sales on the  company earnings.

Calculating the problem:

Total contribution margin = Units sold × contribution margin per unit

                                           = 1000 × (50×60%)

                                             = 1000×30

                                              = $30,000

Net operating income = Total contribution margin - fixed expenses

                                             = 30000 - 20000

                                           = $10,000

Degree of operating leverage = Total contribution margin / net operating income

                                                    = 30000 / 10000

                                                      = 3

What Is Operating Leverage?

Operating leverage is a cost-accounting formula that calculates  the degree to which a firm or project can gain  operating income by increasing revenue. A business that operates sales with a high gross margin and low variable costs has high operating leverage.

Learn more about Operating leverage:

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