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Compute the degree of operating leverage

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Question: 1. Company A is a manufacturer with current sales of $3,000,000 and a 60% contribution margin. Its fixed costs equal $1,300,000. Company B is a consulting firm with current service revenues of $3,000,000 and a 25% contribution margin. Its fixed costs equal $250,000. Compute the degree of operating leverage (DOL) for each company. Identify which company benefits more from a 20% increase in sales and explain why.

2. If cost per unit of activity remains constant (fixed), why is it called a variable cost?

Reference no: EM131539052

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