Question

Taft Co. reports the following data: Sales $875,000 Variable costs 425,000 Contribution margin $450,000 Fixed costs 150,000 Income from operations $300,000 Determine Taft Co.'s operating leverage. Round your answer to one decimal place.

Answer 1

Answer:

1.5

Explanation:

The computation of operating leverage is shown below:-

where,

The (Sales - Variable costs) = Contribution margin

The  (Sales - Variable costs - Fixed costs) = EBIT

So, the operating leverage is

= (Contribution margin ) ÷ (Earning before Interest and Taxes)

= ($875,000 - $425,000) ÷ ($875,000 - $425,000 - $150,000)

= $450,000 ÷ $300,000

= 1.5