A business has total sales of $54,135 and variable costs of $3,441. Fixed costs are $4,992.What is the business's degree of operating leverage? (DOL). Please enter your responses to 2 decimal places.
Question
A business has total sales of 3,441. Fixed costs are $4,992.What is the business's degree of operating leverage? (DOL). Please enter your responses to 2 decimal places.
Solution
The degree of operating leverage (DOL) is calculated using the following formula:
DOL = 1 + (Fixed Costs / Contribution Margin)
The contribution margin is calculated by subtracting the variable costs from the total sales.
Step 1: Calculate the Contribution Margin Contribution Margin = Total Sales - Variable Costs Contribution Margin = 3,441 = $50,694
Step 2: Calculate the Degree of Operating Leverage DOL = 1 + (Fixed Costs / Contribution Margin) DOL = 1 + (50,694) = 1.098
So, the business's degree of operating leverage is 1.10 (rounded to two decimal places).
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