Question

Adams, Inc. has sales of $100,000 with a contribution margin of $60,000 and net income of $20,000. Baron, Inc. has sales of $110,000 with a contribution margin of $44,000 and net income of $22,000. Thus, the degree of operating leverage is [blank] for Adams, Inc. and [blank] for Baron, Inc. (Enter your answers as whole numbers.)

Answer 1

To calculate the degree of operating leverage (DOL) for both Adams, Inc. and Baron, Inc., we use the following formula:

\[
\text{Degree of Operating Leverage (DOL)} = \frac{\text{Contribution Margin}}{\text{Net Income}}
\]

**For Adams, Inc.:**

- Contribution Margin = $60,000
- Net Income = $20,000

\[
\text{DOL for Adams} = \frac{60,000}{20,000} = 3
\]

**For Baron, Inc.:**

- Contribution Margin = $44,000
- Net Income = $22,000

\[
\text{DOL for Baron} = \frac{44,000}{22,000} = 2
\]

Therefore, the degree of operating leverage is **3** for Adams, Inc. and **2** for Baron, Inc.