Answer: 1. Degree of Operating Leverage = 4
2. $384,000
Explanation:
1. Degree of Operating Leverage is calculated by dividing the Contribution margin by the Net Operating income.
Now, the Contribution margin is the difference between Price and Variable Cost. This means that if you remove fixed costs from it as well you get your profit.
Therefore 1. can be calculated thus,
Degree of Operating Leverage = Contribution Margin / Net Operating income
Degree of Operating Leverage = 960,000 / 960,000 - 720,000
Degree of Operating Leverage = 4
2. When Sales increases by a certain percentage we multiply that percentage by the Degree of Operating Leverage to find out how much Income will increase by.
Because sales went up by 15%, Singh Co. can expect that income would rise by,
= 15% * 4
= 60%.
Now income is Contribution margin - fixed costs so we have,
Income = 960,000 - 720,000
Income = $240,000
An increase of 60% would be
= 240,000( 1+ 60%)
=$384,000
$384,000 is the amount of income that Singh Co. can expect.
