CFA Level I · CFA Level I Exam · Financial Statement Forecasting in Equity Valuation
A company has sales of 800, variable costs of 480 and fixed costs of 200. Using the degree of operating leverage (DOL) based on contribution margin, a 10% increase in sales would most likely increase operating income by:
This item is invalid as keyed.
- A10%
- B16%Correct
- C40%
Explanation
Contribution = 800 - 480 = 320. Operating income = 320 - 200 = 120. DOL = 320/120 = 2.67. Income rises by about 2.67 x 10% = 26.7%. Checking directly: sales 880, variable costs 528, contribution 352, income 152; 152/120 -1 = 26.7%. None of the options matches, so the numbers must be revisited.
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