Question

Information for two companies follows:

skittles company starburst company
sales $ 6,000,000 $ 4,500,000
contribution margin 3,600,000 1,125,000
fixed costs 2,600,000 375,000

(1) compute the degree of operating leverage (dol) for each company.

Answer 1

To calculate the degree of operating leverage (DOL) for each company, first find the contribution margin ratio by dividing the contribution margin by the sales revenue. Then, use the formula DOL = 1 / (1 - contribution margin ratio).

Step-by-step explanation:

First, we need to calculate the contribution margin ratio for each company. This is found by dividing the contribution margin by the sales revenue. For Skittles Company, the contribution margin ratio is $3,600,000 / $6,000,000 = 0.6. For Starburst Company, the contribution margin ratio is $1,125,000 / $4,500,000 = 0.25.

Next, we can calculate the degree of operating leverage (DOL) for each company using the formula DOL = 1 / (1 - contribution margin ratio).

For Skittles Company, DOL = 1 / (1 - 0.6) = 1 / 0.4 = 2.5. For Starburst Company, DOL = 1 / (1 - 0.25) = 1 / 0.75 = 1.33.