Question

Paul’s company has recently made some changes that have impacted many of the items reported on its income statement. For example, the company’s contribution margin is now $450,000, whereas it used to be $200,000. The net income for the company, however, has stayed the same at $110,000. What is the new degree of operating leverage for Paul’s company?

Answer 1

The new degree of operating leverage for Paul’s company is $4.09

Step-by-step explanation:

The formula to compute the operating leverage is shown below:

Operating leverage = (Contribution margin) ÷ (Earnings before income and taxes)

= ($450,000) ÷ ($110,000)

= 4.09

The operating leverage shows a relationship between the contribution margin and the net income or earning before income and taxes so we ignored the used amount i.e $200,000