Assume that the amounts of the company’s total variable expenses and total fixed
ID: 2448074 • Letter: A
Question
Assume that the amounts of the company’s total variable expenses and total fixed expenses were reversed. In other words, assume that the total variable expenses are $7,668 and the total fixed expenses are $13,400. Under this scenario and assuming that total sales remain the same, what is the degree of operating leverage? (Round your answer to 2 decimal places.)
Oslo Company prepared the following contribution format income statement based on a sales volume of 1,000 units (the relevant range of production is 500 units to 1,500 units):Explanation / Answer
Oslo Company Contribution format Income Statement Original Reversal/change Sales $24,200 $24,200 Variable Expenses $13,400 $7,668 Contribution Margin $10,800 $16,532 Fixed Expenses $7,668 $13,400 Net Operating Income $3,132 $3,132 Degree of Operating Leverage = Contribution Margin/Operating Income = $16,532 $3,132 = 5.28 DOL is interpreted as follows: A 1% increase in Contribution Margin above the $ 16,532 level increases Net operating income by 5.28% as per of the existing operating leverage of the firm