Use the below information to answer the following question. Sales (1,000 units) $ 200,000 Variable costs 110,000 Contribution margin 90,000 Fixed manufacturing costs 40,000 Operating income 50,000 Interest 10,000 Earnings before taxes 40,000 Taxes (30%) 12,000 Net income $ 28,000 Shares Outstanding 1,000 The degree of operating leverage (DOL) is .

a. 1.62x
b. 1.80x
c. 3.50x
d. 1.40x

b. 1.80x

Explanation:

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

= (Contribution margin) ÷ (Contribution margin - Fixed manufacturing costs)

= ($90,000) ÷ ($90,00 - $40,000)

= $90,000 ÷ $50,000

= 1.80

The (Sales - Variable costs) = Contribution margin

The  (Sales - Variable costs - Fixed costs) = EBIT

By dividing the contribution margin by EBIT the degree of operating leverage (DOL) can come