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Marina Manufacturing is considering buying new equipment for its factory. The new equipment will reduce...

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Question

Accounting

Marina Manufacturing is considering buying new equipment for its factory. The new equipment
will reduce variable labor costs but increase depreciation expense. Contribution margin is
expected to increase from $250,000 to $300,000. Net income is expected to remain the same at
$100,000.
Instructions
(a) Compute the degree of operating leverage before and after the purchase of the new
equipment. SHOW YOUR WORK
(b) Interpret your results. Discuss the change in earnings volatility and the why the changes
caused this change.
(b)(HINT: Change in net income equals the after DOL divided by the before DOL.)
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