Answer: Company A - 5.41
Company B - 1.77
Explanation:
The Degree of operating leverage (DOL) is measure that can tell what happens to operating income if sales change.
It is calculated by dividing the Contribution Margin by the net income.
Contribution Margin can be defined as the selling price of a good minus the variable costs of the good. Therefore when you see Contribution Margin, the variable costs have been removed already.
DOL Company A
Net Income = Contribution Margin - Fixed Costs
Net Income = (60%* 3,700,000 ) - 1,810,000
Net Income = 2,220,000 - 1,810,000
= $410,000
Degree of Operating Level = Contribution Margin/Net Income
= 2,220,000/410,000
= 5.41
DOL Company B
Net Income = Contribution Margin - Fixed Costs
Net Income = (20%* 3,800,000 ) - 330,000
Net Income = 760,000 - 330,000
= $430,000
Degree of Operating Level = Contribution Margin/Net Income
= 760,000/430,000
= 1.77
