Question

Miller manufacturing's degree of operating leverage is 1.5. warren corporation's degree of operating leverage is 3. warren's earnings would go up (or down by ________ as much as miller's with an equal increase (or decrease in sales.

Answer 1

Warren's earnings would go up (or down) by twice as much as Miller's with an equal increase (or decrease) in sales. The operating leverage is a ratio which describes the relation between the sales, the variable cost, and the fixed cost that used in the production process. 1.5 operating leverage shows that there will be $1.5 increasing in income for each of $1 increase in sales.  3 operating leverage shows that there will be $3 increasing in income for each of $1 increase in sales