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. (2) which company is expected to produce a greater percent increase in income from a 20% increase in sales?

Answer 1

The DOL for Skittles Company is 3.6, and for Starburst Company, it is 1.5. Skittles Company is expected to have a higher percent increase in operating income from a 20% increase in sales due to its higher degree of operating leverage.

Step-by-step explanation:

The student is asking to compute the degree of operating leverage (DOL) for two companies and to determine which company would have a greater percent increase in income from a 20% increase in sales. DOL is a measure of how a company's operating income will change in response to a change in sales.


It is calculated using the formula DOL = Contribution Margin / Operating Income.

For Skittles Company:
Contribution Margin = $3,600,000
Operating Income = Contribution Margin - Fixed Costs = $3,600,000 - $2,600,000 = $1,000,000
DOL = $3,600,000 / $1,000,000 = 3.6

For Starburst Company:
Contribution Margin = $1,125,000
Operating Income = Contribution Margin - Fixed Costs = $1,125,000 - $375,000 = $750,000
DOL = $1,125,000 / $750,000 = 1.5

To determine which company would have a greater percent increase in income from a 20% increase in sales, we compare the DOL of each company. A higher DOL indicates a higher sensitivity to sales changes. Thus, Skittles Company, with a DOL of 3.6, is expected to have a greater percentage increase in operating income than Starburst Company, with a DOL of 1.5, from a 20% increase in sales.