Assume sales volume of 3,000 units, unit variable cost of $3, fixed costs of $15,000.What is operating leverage?

Question

Quizplus · Accepted Answer

Operating leverage is the degree to which a company's sales volume affects its operating income. It can be calculated as follows:

Operating Leverage = Contribution Margin / Operating Income

Contribution Margin = Sales - Variable Costs

Operating Income = Sales - Variable Costs - Fixed Costs

Given:

Sales volume = 3,000 units
Unit variable cost = $3
Fixed costs = $15,000

So,

Sales = 3,000 x Price (Price is unknown)

Variable Costs = 3,000 x $3 = $9,000

Fixed Costs = $15,000

Operating Income = Sales - Variable Costs - Fixed Costs
Operating Income = 3,000 x Price - $9,000 - $15,000

Let's assume the selling price of the unit is $10
So, Sales = 3,000 x $10 = $30,000

Operating Income = $30,000 - $9,000 - $15,000
Operating Income = $6,000

Contribution Margin = Sales - Variable Costs
Contribution Margin = $30,000 - $9,000
Contribution Margin = $21,000

Operating Leverage = Contribution Margin / Operating Income
Operating Leverage = $21,000 / $6,000
Operating Leverage = 3.5 or 350%

Therefore, the operating leverage is 350%. The closest answer choice is D) 62.5%, which is incorrect. None of the answer choices are accurate.

Assume Sales Volume of 3,000 Units, Unit Variable Cost of $3