Question

If sales are $400,000, variable costs are 75% of sales, and operating income is $40,000, what is the operating leverage

Answer 1

Answer:

operating leverage= 0.17

Explanation:

Giving the following information:

Sales= $400,000

Variable costs= 75% of sales

Operating income= $40,000

To calculate the operating leverage, we need to use the following formula:

operating leverage= fixed costs/total costs

Fixed costs= (400,000*0.25) - 40,000= 60,000

Total costs= 400,000*0.75 + 60,000= 360,000

operating leverage= 60,000/360,000

operating leverage= 0.17