Question

Carver Packing Company reports total contribution margin of $80,960 and pretax net income of $25,300 for the current month. In the next month, the company expects sales volume to increase by 5%. The degree of operating leverage and the expected percent change in income, respectively, are:

Answer 1

3.2 & 16%

Step-by-step explanation:

Degree of operating leverage = Contribution margin / Pretax net income

Degree of operating leverage = $80,960 / $25,300

Degree of operating leverage = 3.2

Degree of operating leverage 3.2 means if sales (or contribution margin) increases by 1%, income increases by 3.2 %.

Thus, Expected % change in income = Increase in sales * degree of operating leverage

Expected % change in income = 5% * 3.2

Expected % change in income = 0.5 * 3.2

Expected % change in income = 0.16

Expected % change in income = 16%