Question

Dublin Company and Gary Corp. have degrees of operating leverage of 4.5 and 2.7, respectively. Both companies have net income of $80,000. Required: 1. Without performing any calculations, which company is more vulnerable to fluctuations in sales level? 2. Determine each company’s total contribution margin.

Answer 1

Req 1: The firm having degree of operating leverage is more vulnerable to fluctuations in sales. This is because degree of operating leverage determines the % change in income for each percentage change in sales. Therefore, as per above facts, Dublin Company will be vulnerable to fluctuations in sales as 1% change in sales will result in 4.5% change in income.

Req 2:

Tthe contribution margin of each firm is as under:

			DUBLIN	GARY CORP
Degree of Operating leverage			4.5	2.7
Net income			80000	80000
Contribution margin			360000	216000
(Degree * Net Income)