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Morse company reports total contribution margin of $56,250 and income of $12,500 for the current month. the degree of operating leverage is 4.5.
Degree of operating leverage
= Sales -Variable cost
Sales - Variable cost - Fixed cost
= Contribution
Pre-tax net income
= $56,250/$12500
= 4.5
Degree of operating leverage is the ratio of contribution to pre-tax net income. Contribution = $48,000 and pre-tax net income = $12,000.
The division pf contribution by pre-tax net income gives the degree of operating leverage.
Divide an entity's contribution margin by its net operating income to determine operating leverage. The contribution margin is calculated as sales less variable costs.
In general, strong operating leverage is preferable to low operating leverage since it enables enterprises to make significant profits on every additional sale. However, businesses with minimal operating leverage could find it simpler to turn a profit when coping with reduced sales levels.
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