Question

Oslo Co prepared the following Contribution Format income statement based on sales volume of 1,000 units. (the relevant rage of production is 500 to 1500 units):

Sales 80,000
Var C 52,000
CM 28,000
Fixed 21,840
NOI 6,160

Assume that the amounts of the company's total variable expenses and total fixed expenses were reversed. In other words, assume that the total variable expenses are $21,840 and the total fixed expenses are $52,000. Under this scenario and assuming that total sales remain the same, what is the degree of operating leverage?

Answer 1

The degree of operating leverage (DOL) is 0.

Step-by-step explanation:

The degree of operating leverage (DOL) measures the percentage change in operating income resulting from a change in sales volume. It can be calculated by dividing the percentage change in operating income by the percentage change in sales. Under the scenario where the total variable expenses are $21,840 and the total fixed expenses are $52,000, we need to calculate the new contribution margin (CM) and operating income before calculating the DOL.

To calculate the new CM, subtract the reversed total variable expenses from the sales (80,000 - 21,840 = $58,160). To calculate the new operating income (NOI), subtract the reversed total fixed expenses from the new CM (58,160 - 52,000 = $6,160).

Now we can calculate the DOL:

DOL = (New NOI - Old NOI) / (Old NOI)

Substituting the values:

DOL = (6,160 - 6,160) / 6,160

DOL = 0