Question

What is the degree of operating leverage? A : The total contribution margin relative to a...

What is the degree of operating leverage?

A : The total contribution margin relative to a company’s sales.

B : The change in fixed costs divided by the change in net income.

C : The total change in sales relative to the change in variable costs.

D : The change in operating income relative to the change in sales.

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Answer #1

The correct answer is

D) The change in operating income relative to the change in sales

Explanation

Degree of operating leverage is calculated by

= Contribution margin / net income

Degree of operating leverage is responsiveness of changes in net income due to changes in 1 % of sales. if the degree of operating leverage is 5 it means if sales increases by 1 %, then net income will increase by 5%. So it is changes in operating income relative to change in sales. So the correct answer is

D) The change in operating income relative to the change in sales.

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