Question

Schlictor company sells cordless razors for $50. Variable costs are 40% of sales and total fixed costs are $40,000. What is the firm's operating leverage if 2,000 units are sold?

Answer 1

Answer: Schlictor's operating leverage when 2000 units are sold is 3.

The degree of operating leverage is used to calculate the change in operating income with respect to a percentage change in sales.

We can calculate operating leverage of a firm with the help of the following formula:

$Degree of operating leverage = \frac{Sales - Variable Costs}{Sales - (Variable costs + Fixed Costs)}$

Substituting the values from the question we get

$Degree of operating leverage = \frac{(50 * 2000) - (50*0.40*2000)}{[50*2000] - [(50*0.4*2000) + 40000]}$

$Degree of operating leverage = \frac{100000 - 40000}{[100000] - [(40000) + 40000]}$

$Degree of operating leverage = \frac{60000}{20000}$

$Degree of operating leverage = 3$