Question

Tippy Canoe Company sells 500 canoes at $300/each per year and has a contribution margin of $100 per canoe and currently has a net operating income of $49,000 per year. What is their degree of operating leverage?

a) 1.02
b) 3.06
c) 2.04
d) None of the above

Answer 1

The degree of operating leverage for Tippy Canoe Company is calculated by dividing the total contribution margin by the net operating income, which yields approximately 1.02, indicating that a 1% increase in sales volume would increase net operating income by about 1.02%.

Step-by-step explanation:

The student has asked how to calculate the degree of operating leverage for Tippy Canoe Company. To find the degree of operating leverage, we use the formula:

Degree of Operating Leverage = Contribution Margin / Net Operating Income

Given that the contribution margin is $100 per canoe and the net operating income is $49,000, and they sell 500 canoes per year, the contribution margin would be:

Total Contribution Margin = 500 canoes * $100/canoe = $50,000

The degree of operating leverage is therefore:

Degree of Operating Leverage = $50,000 / $49,000 ≈ 1.02

Hence, the correct answer is a) 1.02. This means that a 1% increase in sales volume would result in approximately a 1.02% increase in net operating income.