Please answer the following multiple choices questions with detailed explainatio
ID: 2446735 • Letter: P
Question
Please answer the following multiple choices questions with detailed explaination:
Shaw Corporation's product has a Contribution Margin per unit of $1.20, and their Fixed Costs are $100,000. They just sold 200,000 units.
a) What is their approximate "degree of operating leverage?" (Be certain to refer to my Supplemental Lecture Notes as demonstrated and posted)
a. 2.00
b. 1.71
c. 1.55
d. 1.28
b) Using the "degree of operating leverage," if SALES will increase by 5% next year, by approximately what percent should Net Operating Income increase?
a. 7.75%
b. 8.55%
c. 6.4%
d. 10%
Explanation / Answer
Degree Of Operating Leverage = Contribution / Operating Income
= 200000*1.20/(200000*1.20)-100000
= 240000/140000 i.e 1.71
Degree of operating leverage = % change in EBIT / % Change in Sales
1.71 = % Change in Ebit / 5%
% Change in EBIT = 5%*1.71 i.e 8.55%