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Corporate Finance Q99

99The unit contribution margin for a product is $12. A firm’s fixed operating cost is $600,000. The degree of operating leverage (DOL) is most likely the lowest at which of the following production levels (in units)?
  • Option : C
  • Explanation : DOL = (quantity * contribution margin) / [(quantity * contribution margin) – fixed costs]
    DOL (100,000 units) =($12 * 100,000) / [($12 * 100,000) – 600,000] = 2.00
    DOL (200,000 units) = ($12 * 200,000) / [($12 * 200,000) – 600,000] = 1.33
    DOL (300,000 units) = ($12 * 300,000) / [($12 * 300,000) – 600,000] = 1.20
    The DOL is lowest at the 300,000 unit production level.
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