Question

"If sales increase by 5% and the degree of operating leverage is 4, net operating income should increase by ______.

A.0.25%
B.20%
C.1%
D.9%"

Answer 1

The net operating income should increase by 20%.

Step-by-step explanation:

The degree of operating leverage (DOL) measures how sensitive net operating income is to changes in sales. It is calculated by dividing the percentage change in net operating income by the percentage change in sales. In this case, the degree of operating leverage is 4.

Then, if sales increase by 5%, we can calculate the percentage increase in net operating income by multiplying the sales percentage increase by the degree of operating leverage:

Net Operating Income Increase = Sales Percentage Increase × Degree of Operating Leverage = 5% × 4 = 20%

Therefore, net operating income should increase by 20%.