Tom's Taxidermy has a monthly target operating income of $29,000. 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?

Question

Quizplus · Accepted Answer

Operating leverage factor = Contribution Margin / Operating Income. First, find the sales needed to meet the target operating income. Let sales = x. Then, 0.25x (since variable expenses are 75% of sales, contribution margin is 25% of sales) - $15,000 (fixed expenses) = $29,000 (target operating income). Solving for x gives x = $176,000 in sales. Contribution margin at this level is 0.25 * $176,000 = $44,000. Therefore, the operating leverage factor = $44,000 / $29,000 = 1.52.

Tom's Taxidermy Has a Monthly Target Operating Income of $29,000