# degree of operating leverage

ABC company currently has \$ 2 million in sales. it's variable costs equal 70%of it sale , it's fixed cost are \$100000 and its annual interest expenses is \$50000.

(1) what is ABC company degree of operating leverage？

(2) If ABC company operating income (EBIT) rise by 10%,how much will its net income increase?

(3) If the company sale increase 10%,how much will the company net income increase?

Rating

Operating Leverage =[Quantity x (Price - Variable Cost per unit)] / [Quantity x (Price - Variable Cost per Unit) - Fixed Operating Cost].

or = Sales\$ X (1 - variable cost%) / [Sales\$ X (1 - variable cost%) - \$ fixed cost]

(1) ABC company's degree of operating leverage:

= \$2,000,000 X 30% / (\$2,000,000 X 30% - \$100,000)

= \$600,00 / \$500,000

= 1.2 or 120%

meaning: 10% increase in Sales Revenue will result in 12% increase in operating income.

(2)

Ratio of EBIT to Net Income

= \$500,000 / (\$500,000 - \$50,000)

= \$500,000 / \$450,000

= 1.11 or 111%

If EBIT rises by 10%, Net income will rise by 10% X 1.11 = 11.1%

(3)

Ratio of Sales to Net Income

= Operating Leverage X Ratio of EBIT to Net Income

= 1.20 X 1.11

= 1.32 or 132%

if Sales increases by 10%, net income will increase by 13.2%

Source(s): My past Learning