Question

The degree of operating leverage can be computed as:

a. net income divided by contribution margin ratio.
b. contribution margin divided by net income.
c. contribution margin ratio times the sales mix percentage.
d. net income divided by the sales mix percentage.

Answer 1

b. contribution margin divided by net income.

Step-by-step explanation:

The formula to compute the degree of operating leverage is shown below:

= (Sales - Variable costs) ÷ (Sales - Variable costs - Fixed costs)

The (Sales - Variable costs) = Contribution margin

The (Sales - Variable costs - Fixed costs) = EBIT

The EBIT is also known as the net income. EBIT means Earning before interest and taxes

Hence, the correct option is b.