Answer:
Explanation:
Company A: DOL = Contribution Margin/Operating Income
Contribution Margin = sales *45% = 10,000,000*45%= 4,500,000
Operating Income = contribution margin less fixed cost = 4,500,000-3,00,000 = 1,500,000
DOL = 4,500,000/1,500,000
= 3
Company B: DOL = Contribution Margin/Operating Income
Contribution Margin = sales *20% = 5,000,000*20%= 1,000,000
Operating Income = contribution margin less fixed cost = 1,000,000-500,000 = 500,000
DOL = 1,000,000/500,000
= 2
With an Increase in sales of 25%
Company A=DOL = Contribution Margin/Operating Income
Contribution Margin = sales *45% = 12,500,000*45%= 5,625,000
Operating Income = contribution margin less fixed cost = 5,625,000-3,00,000 = 2,625,000
DOL = 5,625,000/2,625,000
= 2.14
Company B: DOL = Contribution Margin/Operating Income
Contribution Margin = sales *20% = 6,250,000*20%= 1,250,000
Operating Income = contribution margin less fixed cost = 1,250,000-500,000 = 750,000
DOL = 1,250,000/750,000
=1.67
From the above, Company A with a 25% increase in sales will record a 50% and above increase in operating Income because its degree of operating leverage is 2.14
