Question

Compute the degree of operating leverage for Magenta Company from the following information. (Round answer to one decimal place.)

Sales $500,000
Variable Expenses $200,000
Fixed expenses $100,000

Answer 1

The degree of operating leverage (DOL) measures the sensitivity of a company's operating income to changes in its sales revenue. To calculate the DOL, you can use the formula: DOL = Contribution Margin / Operating Income. In this case, the degree of operating leverage for Magenta Company is 1.5.

Step-by-step explanation:

The degree of operating leverage (DOL) measures the sensitivity of a company's operating income to changes in its sales revenue. It indicates the percentage change in operating income that can be expected for a given percentage change in sales revenue. To calculate the DOL, you can use the formula: DOL = Contribution Margin / Operating Income.

In this case, the sales revenue is $500,000, the variable expenses are $200,000, and the fixed expenses are $100,000. The Contribution Margin is calculated as: Sales Revenue - Variable Expenses = $500,000 - $200,000 = $300,000. The Operating Income is calculated as: Contribution Margin - Fixed Expenses = $300,000 - $100,000 = $200,000. Therefore, the degree of operating leverage for Magenta Company is: DOL = $300,000 / $200,000 = 1.5 (rounded to one decimal place).