Question

If sales increase by 5% and the degree of operating leverage is 4, net operating income should increase by Blank______.

Multiple choice question.

9%


20%


1%


0.25%

Answer 1

To find the increase in net operating income (NOI) based on the increase in sales and the degree of operating leverage (DOL), you can use the following formula:

\[
\text{Percentage Increase in NOI} = \text{Degree of Operating Leverage} \times \text{Percentage Increase in Sales}
\]

Given:
- Percentage Increase in Sales = 5% (or 0.05)
- Degree of Operating Leverage (DOL) = 4

Now, substitute the values into the formula:

\[
\text{Percentage Increase in NOI} = 4 \times 0.05 = 0.20 \text{ or } 20\%
\]

Therefore, if sales increase by 5% and the degree of operating leverage is 4, net operating income should increase by **20%**.

So, the correct answer is: **20%**.