13An (Operating leverage) In light of a sales agreement that NVW just signed with a national chain of health food restaurants, NVW CFO, Jackie Cheng, is estimating that NVWâ??s sales in the next year will be 50,000 bottles at $30 per bottle. If the variable costs are expected to be 70% of sales, what is NVWâ??s expected degree of operating leverage?
This is what I have so far:
Item current sales Level Forecast Sales Level, t+1
Sales 1,200,000 100% 1,500,000 100%
Less: total variable costs 840,000 70 1,050,000 70%
Revenue before fixed costs 360,000 30% 450,000 30%
Less: total fixed costs 360,000 360,000
EBIT 0 90,000
Increase of sales = 300,000
Formula: Degree of Operating Leverage (DOL) = Total Contribution / Operating Income.
Note: At breakeven point the DOL is infinity because operating ...
The solution computes degree of operating leverage.