Check r Company A is a manufacturer with current sales of 29

Check r Company A is a manufacturer with current sales of $2,900,000 and a 50% contribution margin. Its Company B is a consulting firm with current service revenues of $3,000,000 and a 20% contribution margin, its fixed costs equ $90,000. Compute the degree of operating leverage (DOL) for each company. fixed costs equal S960,000. al Contribution Margin Income Statement Company B Deg ting Leverage Numerator Denominator Ratio Degree of Operating Leverage Company A Company B

Solution

Solution:

Part 1 --- Contribution Margin Income Statement

Contribution Margin Income Statement

Company A

Company B

Sales / Service Revenue

$2,900,000

$3,000,000

Variable Costs

Company A -- 50% of Sales

Company B -- 80% of Sales

$1,450,000

$2,400,000

Contribution Margin

Company A -- 50% of Sales

Company B -- 20% of Sales

$1,450,000

$600,000

Fixed Costs

$960,000

$90,000

Operating Profit

$490,000

$510,000

Part 2 – Degree of Operating Leverage

Degree of Operating Leverage (DOL) = Contribution Margin / Net Operating Income

Choose:

Numerator

/

Denominator

=

Ratio

Contribution Margin

/

Net Operating Profit

=

Degree of Operating Leverage

Company A

$1,450,000

/

$490,000

=

2.959

Company B

$960,000

/

$510,000

=

1.882

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Contribution Margin Income Statement
	Company A	Company B
Sales / Service Revenue	$2,900,000	$3,000,000
Variable Costs Company A -- 50% of Sales Company B -- 80% of Sales	$1,450,000	$2,400,000
Contribution Margin Company A -- 50% of Sales Company B -- 20% of Sales	$1,450,000	$600,000
Fixed Costs	$960,000	$90,000
Operating Profit	$490,000	$510,000