The following income statement is provided for Vargas,Inc. $$\begin{array} { l r }
\text { Sales reverule (2,500 urits } \times \$ 60 \text { per unit) } & \$ 150,000 \
\text { Cost of goods sold (variable; } 2,500 \text { urits } \times \$ 20 \text { per unit) } & ( 50,000 ) \
\text { Cost of goods sold (fixed) } & \underline{ ( 8,000 )} \
\text { Gross margin } & 92,000 \
\text { Adrninistrative salaries } & ( 42,000 ) \
\text { Depreciation } & ( 10,000 ) \
\text { Supplies } ( 2,500 \text { urits } \times \$ 4 \text { per unit) } & \underline{( 10,000 )} \
\text { Net income } & \underline{ \$ 30,000} \

\end{array}$$ What is this company's magnitude of operating leverage?
A) 3.07
B) 0.33
C) 3.00
D) 1.67

Question

The following income statement is provided for Vargas,Inc. $$\begin{array} { l r } 
\text { Sales reverule (2,500 urits } \times \$ 60 \text { per unit) } & \$ 150,000 \
\text { Cost of goods sold (variable; } 2,500 \text { urits } \times \$ 20 \text { per unit) } & ( 50,000 ) \
\text { Cost of goods sold (fixed) } & \underline{ ( 8,000 )} \
\text { Gross margin } & 92,000 \
\text { Adrninistrative salaries } & ( 42,000 ) \
\text { Depreciation } & ( 10,000 ) \
\text { Supplies } ( 2,500 \text { urits } \times \$ 4 \text { per unit) } &  \underline{( 10,000 )} \
\text { Net income } & \underline{ \$ 30,000} \

\end{array}$$ What is this company's magnitude of operating leverage?
A) 3.07
B) 0.33
C) 3.00
D) 1.67

Quizplus · Accepted Answer

The magnitude of operating leverage (MOL) can be calculated as follows:

MOL = Contribution Margin / Operating Income

Using the data given in the income statement, we can calculate the contribution margin and operating income as follows:

Contribution Margin = Sales - Variable Expenses
= $240,000 - $120,000
= $120,000

Operating Income = Gross Profit - Operating Expenses - Depreciation
= $160,000 - $40,000 - $12,000
= $108,000

Therefore, the MOL = $120,000 / $108,000 = 3.00

Hence, the best choice is C, which is 3.00.

The Following Income Statement Is Provided for Vargas,Inc What Is This Company's Magnitude of Operating Leverage? A) 3

The Following Income Statement Is Provided for Vargas,Inc What Is This Company's Magnitude of Operating Leverage?
A) 3