Question

Degree of Operating Leverage

Head-First Company plans to sell 5,000 bicycle helmets at $75 each in the coming year.

Unit variable cost is $50 (includes direct materials, direct labor, variable factory overhead, and variable selling expense).

Total fixed cost equals $49,500 (includes fixed factory overhead and fixed selling and administrative expense).

Operating income at 5,000 units sold is $75,500.

Calculate the degree of operating leverage. (Round your answer to the nearest tenth.)

Answer 1

Answer:

1.655

Explanation:

Operating income:

= Sales revenue - Variable cost - Fixed cost

= (5,000 × $75) - (5,000 × $50) - $49,500

= $375,000 - $250,000 - $49,500

= $75,500

Operating Leverage:

= (Sales- Variable cost ) ÷ (Sales -Variable cost - fixed cost)

= $125,000 ÷ $75,500

= 1.655

Therefore, the degree of operating leverage is 1.655