Question

Tom's Taxidermy has a monthly target operating income of $25,000. Variable expenses are 75% of sales and monthly fixed expenses are $15,000. What is Tom's operating leverage factor at the target level of operating income

Answer 1

Answer:

1.6

Explanation:

Compute the contribution margin: -

Operating Income=Contribution Margin−Fixed Costs

Contribution Margin=Operating Income+Fixed Costs

Contribution Margin=$25,000+$15,000

Contribution Margin=$40,000​

Compute the operating leverage factor for the business as follows: -

Operating leverage Factor= $\frac{Contribution Margin}{Operating Income}$

​OperatingleverageFactor= $\frac{40000}{25000}$

OperatingleverageFactor= $\frac{8}{5}$

​OperatingleverageFactor= 1.6​

So The operating leverage factor of the business will be 1.6.