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Managerial Accounting: The Corners...

7th Edition
Maryanne M. Mowen + 2 others
ISBN: 9781337115773

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Managerial Accounting: The Corners...

7th Edition
Maryanne M. Mowen + 2 others
ISBN: 9781337115773
Textbook Problem
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Degree of Operating Leverage

Head-First Company plans to sell 5,000 bicycle helmets at $75 each in the coming year. Unit variable cost is $45 (includes direct materials, direct labor, variable factory overhead, and variable selling expense). Total fixed cost equals $49,500 (includes fixed factory overhead and fixed selling and administrative expense). Operating income at 5,000 units sold is $100,500.

Required:

Calculate the degree of operating leverage. (Note: Round answer to the nearest tenth.)

To determine

Compute the degree of operating leverage.

Explanation

Degree of Operating Leverage (DOL):

The degree of operating leverage is evaluated by dividing the total contribution margin by the operating income of the company.

Use the following formula to calculate the degree of operating leverage:

DOL=Total contribution margin1Operating income

Substitute $150,000 for total contribution margin and $100,500 for operating income in the above formula.

DOL=$150,000$100,500=1.5

Therefore, the degree of operating leverage is 1.5.

Working Note:

1

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