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22 February, 04:54

Sales in North Corporation increased from $80,000 per year to $84,000 per year while net operating income increased from $30,000 to $36,000. Given this data, the company's degree of operating leverage must have been:

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  1. 22 February, 07:06
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    4 times

    Explanation:

    Given that,

    Initial sales = $80,000

    New sales = $84,000

    Initial net operating income = $30,000

    New net operating income = $36,000

    The degree of operating leverage is determined by dividing the percentage change in net operating income by the percentage change in the sales.

    Percentage change in net operating income:

    = [ (New net operating income - Initial net operating income) : Initial net operating income] * 100

    = [ ($36,000 - $30,000) : $30,000] * 100

    = ($6,000 : $30,000) * 100

    = 0.2 * 100

    = 20%

    Percentage change in sales:

    = [ (New sales - Initial sales) : Initial sales] * 100

    = [ ($84,000 - $80,000) : $80,000] * 100

    = ($4,000 : $80,000) * 100

    = 0.05 * 100

    = 5%

    Degree of operating leverage:

    = Percentage change in net operating income : Percentage change in sales

    = 20 : 5

    = 4 times
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