Question

If sales increase from $400,000 to $450,000, and if the degree of operating leverage is 6, net operating income should increase by:

A) 12.5%
B) 75%
C) 67%
D) 50%

Answer 1

The percentage increase in net operating income resulting from a rise in sales from $400,000 to $450,000 with a degree of operating leverage of 6 is 75%.

Step-by-step explanation:

The question asks about the impact of a sales increase on net operating income given a certain degree of operating leverage. The degree of operating leverage measures how a percentage change in sales will affect the percentage change in operating income. To calculate the percentage increase in net operating income, we can multiply the percentage increase in sales by the degree of operating leverage.

In this scenario, sales increase from $400,000 to $450,000, which is a 12.5% increase (($450,000 - $400,000) / $400,000). Given that the degree of operating leverage is 6, the expected increase in net operating income is 6 times the percentage sales increase.

12.5% sales increase × 6 (degree of operating leverage) = 75% increase in net operating income.

Therefore, the correct answer is B) 75%%.