Asked by Navjot Sandhu on Jun 28, 2024
Verified
Using the degree of operating leverage, the estimated percent increase in net operating income as the result of a 20% increase in sales is closest to:
A) 75.00%
B) 1.60%
C) 250.00%
D) 5.33%
Degree of Operating Leverage
A ratio that measures the effect of a change in sales on operating income by analyzing fixed versus variable costs.
Sales Increase
The rise in the amount of goods or services sold over a specific period, indicating business growth.
Net Operating Income
Measures the profit a company generates from its core business operations, excluding expenses related to interest and taxes.
- Comprehend the use of the degree of operating leverage and how it affects net operating income in response to sales changes.
Verified Answer
= $18,000 ÷ $4,800 = 3.8
Percentage change in net operating income = Degree of operating leverage × Percentage change in sales
= 3.8 × 20% = 75%
Reference: CHO6-Ref15
A company that makes organic fertilizer has supplied the following data:
Learning Objectives
- Comprehend the use of the degree of operating leverage and how it affects net operating income in response to sales changes.
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