A business has a net profit of $790 and a contribution margin of $1,492.

What is the business's degree of operating leverage? (DOL) Please enter your response to 2 decimal places.

Question

A business has a net profit of $790 and a contribution margin of $1,492.

What is the business's degree of operating leverage? (DOL) Please enter your response to 2 decimal places.

BlackTom AI · Accepted Answer

Degree of operating leverage (DOL) equals contribution margin divided by net operating income (net profit): DOL = Contribution Margin / Net Profit.

1) Relevant knowledge points and concepts
- Contribution margin is sales minus variable costs; it represents the amount available to cover fixed costs and generate profit.
- Net profit (operating income for DOL purposes) is the profit after fixed costs are covered.
- DOL measures the sensitivity of operating profit to a change in sales; numerically it is Contribution Margin ÷ Net Profit. A higher DOL means a given percentage change in sales produces a larger percentage change in operating profit.

2) Complete reasoning process, step by step
- Given: Contribution Margin = $1,492; Net Profit = $790.
- Apply the DOL formula: DOL = 1,492 / 790.

3) Calculations with intermediate steps
- Divide numerator by denominator:
  1,492 ÷ 790
- Compute quotient: 790 × 1 = 790; remainder 1,492 − 790 = 702.
- 702 ÷ 790 ≈ 0.8886075949.
- So total quotient ≈ 1 + 0.8886075949 = 1.8886075949.
- Rounded to two decimal places: 1.8886... → 1.89.

4) Why the correct answer is correct
- The formula used is the standard definition of operating leverage. Substituting the given contribution margin and net profit produces the computed quotient. Rounding to two decimal places yields 1.89, matching the required precision.

5) Why other common alternatives would be incorrect
- Using the reciprocal (Net Profit ÷ Contribution Margin) would give ≈0.53, which is not the DOL.
- Subtracting instead of dividing (1,492 − 790 = 702) gives a dollar amount, not a leverage ratio, so that is incorrect.
- Forgetting to round or rounding incorrectly could give 1.88 or 1.90; correct rounding rules yield 1.89.

6) Conclusion
- The degree of operating leverage is 1.89, which matches the provided correct answer.

A business has a net profit of $790 and a contribution margin of $1,492. What is the business's degree of operating leverage? (DOL) Please enter your response to 2 decimal places.简答题

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