Question

Degree of Operating Leverage Chillmax Company plans to sell 3,500 pairs of shoes at $60 each in the coming year. Unit variable cost is $21 (includes direct materials, direct labor, variable factory overhead, and variable selling expense). Total fixed cost equals $78,000 (includes fixed factory overhead and fixed selling and administrative expense). Operating income at 3,500 units sold is $58,500. Required: Calculate the degree of operating leverage. Note: Round answer to one decimal place.

Answer 1

Answer:

1.8

Explanation:

Sales= $60

Variable cost= $21

Quantity= 3,500 pairs of shoes

Fixed operating cost= $58,500

The first step is to calculate the total contribution margin

= sales-variable cost × Quantity

= $60-$21 × 3500

= $39 × 3500

= $136,500

The operating income can be calculated as follows

= Sales - variable cost × Quantity - fixed operating costs

= $60-$21×3500-58,500

= $136,500-58,500

= $78,000

Therefore the degree of operating leverage can be calculated as follows

= Total contribution margin/Operating income

= 136,500/78,000

= 1.8

Hence the degree of operating leverage is 1.8