Question

Fielder Productions reports the following information: Total contribution margin………………… $32,000 Total fixed costs…………………………… $28,000 Required: (a)...

Fielder Productions reports the following information:

Total contribution margin………………… $32,000
Total fixed costs…………………………… $28,000

Required:
(a) Calculate Fielder's degree of operating leverage (DOL).
(b) If sales increase by 6%, what is the expected percentage increase in pretax income?

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Homework Answers

Answer #1

Ans.(a)=

Given,

Contribution Margin = $32,000

Fixed Costs = $28,000

Hence,

EBIT = Contribution Margin - Fixed Costs = 32,000 - 28,000 = $4,000

Therefore,

Degree of Operating Leverage(DOL) = Contribution Margin / EBIT = $32,000 / $4,000 = 8

Ans.(B)=

If Sales increase by 6%, then Contribution Margin will also increase by 6%.

So,

New Contribution Margin = $32,000 + (32,000 * 6%) = $33,920

Therefore,

New EBIT = $33,920 - $28,000 = $5,920

Hence,

Percentage increase in pre-tax income(EBIT) = (New EBIT - Old EBIT) / Old EBIT

= (5,920 - 4,000) / 4,000

= 0.48 ,i.e., 48%

=> I would be glad to receive a feedback or suggestion to the question answered above.

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