If a Company Has a Degree of Operating Leverage of 3.0

question 54

Multiple Choice

If a company has a degree of operating leverage of 3.0 and sales increase by 25%, then:

• A)total variable costs will increase by 75%
• B)total variable costs will not change
• C)profit will increase by 30%
• D)profit will increase by 75%

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Definitions:

Equivalent Costs

The concept in cost accounting that represents the cost of materials, labor, and overheads in partially finished goods, expressed in terms of fully finished goods.

Conversion Cost

Conversion Cost refers to the combined costs of direct labor and manufacturing overheads incurred to convert raw materials into finished products.

Weighted-Average Method

An inventory costing method that calculates the cost of goods sold and ending inventory based on the average cost of all items available for sale during the period.

Equivalent Units

A concept used in cost accounting to express the amount of work done on units of inventory in terms of fully completed units.