Question

Degree of operating leverage: 3 Break-even revenue:220,000 Variable Expense: 45% of Sales What is the actual net operating income?

Answer 1

Break even revenue = Fixed Cost / Contribution margin ratio

$220,000 = Fixed Cost / (100% - 45%)

Fixed cost = $220,000 × 55%

Fixed cost = $121,000

Degree of operating leverage = (Sales - Variable cost) / (Sales - Variable cost - Fixed Cost)

Let Sales be x

3 = (x - 0.45x) / (x - 0.45x - $121,000)

3 = 0.55x / 0.55x - $121,000

1.65x - $363,000 = 0.55x

1.1x = $363,000

x = $330,000

Therefore, sales is $330,000

Variable cost = 45% × $330,000 = $148,500

Contribution margin = $330,000 - $148,500 = $181,500

Operating income = Contribution margin - Fixed cost = $181,500 - $121,000 = $60,500

Hence, the actual net operating income is $60,500.