Question

​​​(Using degree of operating​ leverage) Last year​ Baker-Huggy Inc. had fixed costs of ​$170 comma 000 and net operating income of ​$34 comma 000. If sales increase by 19 ​percent, by how much will the​ firm's NOI​ increase? What would happen to the​ firm's NOI if sales decreased by 21 ​percent?

If sales increase by 19​%, the change in the​ firm's NOI will be

a decrease or an increase of % ​(Select from the​ drop-down menu and round to two decimal​ places.)

If sales decrease by 21​%, the change in the​ firm's NOI will be

a decrease or an increase of ​%. ​(Select from the​ drop-down menu and round to two decimal​ places.)

Answer 1

Degree of Operating Leverage

Degree of Operating Leverage = Contribution Margin / Net Operating Income

Contribution Margin = Fixed cost + Net operating Income

= $170,000 + $34,000

= $204,000

Degree of Operating Leverage = Contribution Margin / Net Operating Income

= $204,000 / $34,000

= 6 Times

Change in NOI If sales increase by 19​%

Change in NOI If sales increase by 19% = Change in sales x Degree of Operating Leverage

= 19% x 6 Times

= 114.00%

“If sales increase by 19%, the change in the firm's NOI will be increased by 114.00%”

Change in NOI If sales decreased by 21%

Change in NOI If sales decreased by 21% = Change in sales x Degree of Operating Leverage

= -21% x 6 Times

= -126.00% (Negative)

“If sales decrease by 21​%, the change in the​ firm's NOI will be decreased by -126.00%”