Multiple Choice
Which of the following best describes the components of stockholders' equity?
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4. Merchandising Operations
Net Sales
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Join thousands of students who trust us to help them ace their exams!Watch the first videoMultiple Choice
Contribution margin divided by net income is known as the:
A
Net sales turnover
B
Gross profit ratio
C
Degree of operating leverage
D
Current ratio
Verified step by step guidance1
Understand the concept of Contribution Margin: Contribution Margin is the difference between sales revenue and variable costs. It represents the portion of sales revenue that contributes to covering fixed costs and generating profit.
Understand the concept of Net Income: Net Income is the profit remaining after all expenses, including fixed costs, variable costs, interest, and taxes, have been deducted from total revenue.
Learn the formula for Degree of Operating Leverage (DOL): The Degree of Operating Leverage is calculated as the Contribution Margin divided by Net Income. This measures the sensitivity of a company's operating income to changes in sales volume.
Interpret the Degree of Operating Leverage: A higher DOL indicates that a company has higher fixed costs relative to variable costs, meaning its operating income is more sensitive to changes in sales volume.
Apply the formula to the problem: To find the Degree of Operating Leverage, divide the Contribution Margin by the Net Income using the formula: . This will give you the DOL value.
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