Question

Turner Company's contribution margin ratio is 15%. If the degree of operating leverage is 12 at the $150,000 sales level, net operating income at the $150,000 sales level must equal: Group of answer choices

Answer 1

Answer:

Net operating income = $1,875

Explanation:

The operating leverage is the ratio of Contribution to Net Operating Income. It is used to analyse the cost structure of a business to determine how much of its total cost is fixed.

It is computed as follows:

Operating leverage = Contribution/Net operating income

Contribution = Contribution margin × Sales revenue

                    = 15% × $150,000

                  = $22,500

Substitute this into the operating leverage equation

12 = 22,500/ y

y = 22,500/12

y = 1,875

Net operating income = $1,875