Homework Answers
Answer
- Requirement: Calculation of Degree of Operating Leverage
|
Before |
After |
||
|
A |
Contribution margin |
$200,000 |
$240,000 |
|
B |
Net Income |
$40,000 |
$40,000 |
|
C = A/B |
Degree of Operating Leverage |
5 |
6 |
- The operating Leverage will increase to 6 if contribution margin increased to $ 240,000, net income being the same.
- This means that % increase in net income would be now ‘6 times’ the % increase in sales. Earlier it was only ‘5 times’.
- Net Income is not increasing which means that Fixed cost is increasing as a result of the change.
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