Question

​(Using degree of operating​ leverage) Last year​ Baker-Huggy Inc. had fixed costs of

​$200,000

and net operating income of

​$27,000.

If sales increase by

20

​percent, by how much will the​ firm's NOI​ increase? What would happen to the​ firm's NOI if sales decreased by

22

​percent?

If sales increase by

20​%,

the change in the​ firm's NOI will be

▼

of

%.

​(Select from the​ drop-down menu and round to two decimal​ places.)

Answer 1

Degree of Operating Leverage = Contribution Margin / Net Operating Income

Contribution Margin = Fixed cost + Net operating Income

= $200,000 + 27,000

= $227,000

Degree of Operating Leverage = Contribution Margin / Net Operating Income

= $227,000 / $27,000

= 8.40740 Times

Change in NOI If sales increase by 20% = Change in sales x Degree of Operating Leverage

= 20% x 8.40740 Times

= 168.15%

“If sales increase by 20%, the change in the firm's NOI will be increased by 168.15%”

Change in NOI If sales decreased by 22% = Change in sales x Degree of Operating Leverage

= -22% x 8.40740 Times

= -184.96% (Negative)

“If sales decrease by 22​%, the change in the​ firm's NOI will be decreased by -184.96%”