Question

Fost Corporation's contribution margin ratio is 20%. If the degree of operating leverage is 15 at the $225,000 sales level, net operating income at the $225,000 sales level must equal: Multiple Choice $2,250 $6,750 $3,000 $5,063

Answer 1

$3,000

Step-by-step explanation:

The computation of the degree of operating leverage is shown below:

Degree of operating leverage = (Sales - Variable costs) ÷ (Sales - Variable costs - Fixed costs)

15 = $45,000 ÷ net operating income

So, the net operating income would be

= $45,000 ÷ 15

= $3,000

The (Sales - Variable costs) = Contribution margin

The (Sales - Variable costs - Fixed costs) = EBIT or net operating income

And, the contribution margin would equal to

= Sales level × contribution margin ratio

= $225,000 × 20%

= $45,000