Question

Young Manufacturing Company plans to sell 600 units at $500 each in the following year. The data on costs is as follows:

Variable cost $400
Total fixed cost $47,000
Operating Income $30,000
Calculate the degree of operating leverage

Answer 1

The degree of operating leverage for Young Manufacturing Company is 3.67.

Step-by-step explanation:

The degree of operating leverage (DOL) is calculated using the formula: DOL = (Sales - Variable Costs) / Operating Income. In this case, the sales amount is $500 per unit, and the company plans to sell 600 units, resulting in total sales of $300,000 (600 units * $500).

The variable cost per unit is $400, leading to a total variable cost of $240,000 (600 units * $400). The total fixed cost is $47,000, and the operating income is $30,000. Plugging these values into the formula, we get DOL = ($300,000 - $240,000) / $30,000 = 3.67.

The degree of operating leverage measures the sensitivity of operating income to changes in sales. In this scenario, a DOL of 3.67 indicates that for every 1% change in sales, the operating income will change by 3.67%. This metric helps assess the company's risk and potential profitability under different sales scenarios.