The accounting manager of Gateway Inns has noted that every time the inn's average occupancy rate increases by 3.3 percent, the operating cash flow increases by 4.6 percent. What is the degree of operating leverage if the contribution margin per unit is $47?
A) .72
B) .85
C) 1.75
D) 1.18
E) 1.39

Question

Quizplus · Accepted Answer

The formula for operating leverage is:

Operating Leverage = (% Change in Operating Cash Flow) / (% Change in Sales)

To find the % change in sales, we need to use the contribution margin (CM) ratio, which is:

CM Ratio = Contribution Margin / Sales

We can use the CM per unit to find the CM ratio:

CM Ratio = CM per Unit / Price per Unit

CM Ratio = $47 / Price per Unit

We don't know the price per unit, but we can assume that it remains constant. Therefore, we can say that:

% Change in Sales = % Change in Occupancy Rate

Now we can use the information given in the problem to find the operating leverage:

Operating Leverage = (4.6%/3.3%) / (3.3%)

Operating Leverage = 1.39

Therefore, the answer is E.

The Accounting Manager of Gateway Inns Has Noted That Every