The following is Shaffer Corporation's contribution format income statement for last month:

Shaffer Corporation's contribution format income
Sales $2,800,000
Less variable expenses 1,680,000
Contribution margin 1,120,000
Less fixed expenses 780,000
Net income $ 340,000

A total of 56,000 units were produced and sold last month. The company has no beginning or ending inventories.

Part D - What is the company's degree of operating leverage?

Question

The following is Shaffer Corporation's contribution format income statement for last month:

Shaffer Corporation's contribution format income
Sales 	$2,800,000
Less variable expenses	  1,680,000
Contribution margin 	1,120,000
Less fixed expenses 	      780,000
Net income 	 $  340,000

A total of 56,000 units were produced and sold last month. The company has no beginning or ending inventories.

Part D - What is the company's degree of operating leverage?

BlackTom AI · Accepted Answer

Degree of operating leverage (DOL) = Contribution margin ÷ Net income, so use the contribution-format statement values.

1) Relevant concepts
- Contribution margin (CM) = Sales − Variable expenses. It measures the amount available to cover fixed costs and then produce profit.
- Degree of operating leverage = CM / Net income (at a given level of sales). It shows the percent change in operating income for a 1% change in sales.
- Per-unit approach: DOL = (CM per unit) / (Net income per unit), which yields the same result.

2) Step-by-step reasoning and calculations (all intermediate steps)
- Given totals: Sales = $2,800,000; Variable expenses = $1,680,000; CM = $1,120,000; Fixed expenses = $780,000; Net income = $340,000; Units = 56,000.
- Verify net income: CM − Fixed = $1,120,000 − $780,000 = $340,000 (consistent).
- Total DOL = CM / Net income = $1,120,000 / $340,000.
- Compute quotient: $1,120,000 ÷ $340,000 = 3.294117647...
- Round to two decimal places: 3.29.

Alternative per-unit check:
- CM per unit = $1,120,000 / 56,000 = $20.00.
- Net income per unit = $340,000 / 56,000 ≈ $6.07143.
- DOL = $20.00 / $6.07143 ≈ 3.294 → 3.29 (same result).

3) Why this answer is correct
DOL uses the contribution margin (the cushion before fixed costs) relative to the resulting operating profit. Using the provided CM and net income produces DOL = 3.29, meaning a 1% change in sales will change operating income by approximately 3.29%.

4) Why the other options are incorrect (brief)
- 8.24 comes from misusing sales instead of contribution margin: Sales ÷ Net income = $2,800,000 / $340,000 ≈ 8.24 — not the DOL formula.
- 2.50 equals Sales ÷ Contribution margin = $2,800,000 / $1,120,000 = 2.50 — again a misapplied ratio.
- 5.74 arises from another incorrect formula/miscalculation (not CM ÷ Net income) and does not match the definition of DOL.

Conclusion: The correct degree of operating leverage is 3.29, matching the provided answer.

类似问题

EA 13 - The operating leverage for Company A is

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An entity with a higher proportion of fixed costs to variable costs compared to an entity with a lower proportion of fixed to variable costs is regarded as:

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