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ki77a [65]
2 years ago
12

Marina Manufacturing is considering buying new equipment for its factory. The new equipment will reduce variable labor costs but

increase depreciation expense. Contribution margin is expected to increase from $250,000 to $300,000. Net income is expected to remain the same at $100,000. Compute the degree of operating leverage before and after the purchase of the new equipment and interpret your results.
Business
1 answer:
Luda [366]2 years ago
8 0

Answer:

2.50 and 3

Explanation:

The computation of the degree of operating leverage is shown below:

Degree of operating leverage = Contribution margin ÷ Net income

Before the purchase, it is

= $250,000 ÷ $100,000

= 2.5

And, after the purchase, it is

= $300,000 ÷ $100,000

= 3

So due to purchase of the new equipment the earning would be dropped by 1.2 times by dividing the 3 by 2.5 and there is a balance in increase and decrease in sales

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