Question

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 Calculate the degree of operating leverage. Note: Round answer to one decimal place..

Answer 1

Answer:

The degree of operating leverage is 2.3

Explanation:

Degree of operating leverage  = [(Sales – Variable costs) x Quantity]/[(Sales – Variable costs) x Quantity – Fixed operating costs]                                 = [($60 - $21) x 3,500 ]/[($60 - $21) x 3,500 - $78,000 ]

= $ 136,500/$58,500

= 2.3

Therefore, The degree of operating leverage is 2.3