chapter 3 cost volume profit relationships

If sales increased by 5% of a degree of operating leverage is for net operating income should increase by

20%

Operating leverage

A measure of how sensitive net operating income is to a given percentage change and dollar sales.

The degree of operating leverage equals

Contribution margin divided by net operating income.

Percentage change in operating income equals

Degree of operating leverage multiplied by percentage change in sales

A company with a high ratio of fixed costs

Is more likely to experience greater profits one sales are up in a company with mostly variable costs, is more likely to experience a loss when sales are down then I company with mostly variable costs

Degree of operating leverage

It's not a ******* constant

Margin of safety is greater and contribution margin ratio lower

Less vulnerable to downturns

Well that's lower fixed costs and higher variable costs

Well enjoy greater profits debility and will be more protected from losses during bad years but at the cost of lower net operating income and good years

When higher fixed costs and lower variable costs are present

Will experience wider swings in net operating income of sales fluctuate with greater profits in good years and greater losses and bad years