Question

Sheridan's Shingle Corporation is considering the purchase of a new automated shingle-cutting machine. The new machine will reduce variable labor costs but will increase depreciation expense. Contribution margin is expected to increase from $247,800 to $272,580. Net income is expected to be the same at $42,000.

Compute the degree of operating leverage before and after the purchase of the new equipment. (Round answers to 2 decimal places, eg 1.52.)
Degree of operating leverage (old)
Degree of operating leverage (new)

Answer 1

The degree of operating leverage (DOL) measures the sensitivity of a company's net income to changes in its sales revenue. It is calculated by dividing the percentage change in net income by the percentage change in sales revenue.

To calculate the degree of operating leverage before the purchase of the new equipment, we need to know the current sales revenue and net income. Unfortunately, these values are not provided in the question. Therefore, we cannot calculate the exact DOL before the purchase.

However, after the purchase of the new equipment, we know that the contribution margin is expected to increase from $247,800 to $272,580, and the net income is expected to remain the same at $42,000.

To calculate the DOL after the purchase, we can use the formula: DOL = (Contribution Margin / Net Income).

Before the purchase, we are unable to calculate the DOL due to the lack of information regarding the sales revenue and net income. However, after the purchase, the DOL can be calculated as follows:

DOL (new) = ($272,580 / $42,000) = 6.49 (rounded to two decimal places).