Homework Answers
Option A is correct i.e. $25,000 loss.
Degree of operating leverage = Contribution margin/Operating income
4.0 = 500,000/operating income
Operating income = $125,000
Fixed cost = Contribution margin - operating income
= 500,000 - 125,000 = $375,000
Calculation of profit after 30% decrease in sales :-
Contribution margin also decreases by 30%, therefore new contribution margin = 500,000 - 30% = 350,000
Profit = Contribution margin - Fixed cost
= 350,000 - 375,000
= $25,000 loss
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