Question

Park competes with Splashy World by providing a variety of rides. Storytime Park sells tickets at $ 100 per person as a​ one-day entrance fee. Variable costs are $ 20 per​ person, and fixed costs are $ 480 comma 000 per month. The breakeven number of tickets is 6 comma 000. If Storytime Park expects to sell 8 comma 000 ​tickets, compute the degree of operating leverage​ (round to two decimal​ places). Estimate the operating income if sales increase by 10​%.

Answer 1

Answer:

A) degree of operating leverage 4

B) 224,000

Explanation:

A) degree of operating leverage:

$\frac{contribution}{profit}$

contribution per ticket:

100 sales price - 20 variable cost = 80 contribution per ticket

8,000 x 80 = 640,000 total contribution

profit: 640,000 - 480,000 = 160,000

$\frac{640,000}{160,000}$

degree of operating leverage: 4

and increase in sales has a multipler effect of 4

B)

Operating income if sales increase by 10%:

8,000 tickets + 10% = 8,800 tickets

8,800 x 80 = 704,000 total contribution

fixed cost     (480,000)

income:         224,000

using degree of operating leverage:

160,000 x (1 + 0.1 x 4) = 160,000  x 1.4 = 224,000