230k views
5 votes
Company A is a manufacturer with current sales of $3,700,000 and a 60% contribution margin. Its fixed costs equal $1,810,000. Company B is a consulting firm with current service revenues of $3,800,000 and a 20% contribution margin. Its fixed costs equal $330,000.Compute the degree of operating leverage (DOL) for each company.Identify which company benefits more from a 20% increase in sales.Company ACompany B

1 Answer

0 votes

Answer:

Company A 5.41

Company B 1.76

Company A benefits more from a 20% increase in sales.

Step-by-step explanation:

The computation of the degree of operating leverage is shown below:-

Particulars Company A Company B

Sales $3,700,000 $3,800,000

Less:

Variable cost $1,480,000 $3,040,000

($3,700,000 × 40%) ($3,800,000 × 80%)

Contribution

margin $2,220,000 $760,000

($3,700,000 × 60%) ($3,800,000 × 80%)

Less:

Fixed cost $1,810,000 $330,000

Pretax income $410,000 $430,000

After this we need to go further so that we can find out the degree of operating leverage For both company

For Company A

= Contribution margin ÷ Pretax income

= $2,220,000 ÷ $410,000

= 5.41

For company B

= Contribution margin ÷ Pretax income

= $760,000 ÷ $430,000

= 1.76

So, from the above calculation we can see that Company A is higher than Company B.

User Jpmarinier
by
8.9k points
Welcome to QAmmunity.org, where you can ask questions and receive answers from other members of our community.

9.4m questions

12.2m answers

Categories