Question

The following income statement is provided for Vargas, Inc. Sales revenue (2,600 units × $20.10 per unit) $ 52,260 Cost of goods sold (variable; 2,600 units × $10.10 per unit) (26,260 ) Cost of goods sold (fixed) (4,100 ) Gross margin 21,900 Administrative salaries (6,100 ) Depreciation (5,100 ) Supplies (2,600 units × $2.10 per unit) (5,460 ) Net income $ 5,240 What is this company's magnitude of operating leverage

Answer 1

Answer: 3.91

Explanation: We can calculate operating leverage by using following formula:-

$operating\:leverage=\frac{contribution}{net\:income}$

where,

contribution = sales - variable cost

                     =  sales - ( variable cost of goods sold + supplies )

                     =  $52,260 - ( $26,260 + $5460)

                     = $20,540

Now, putting the values into equation we get :-

$operating\:leverage=\frac{20,540}{5,240}$

                                          = 3.91