Light Me Up Lamps has variable expenses of 30% of sales and monthly fixed expenses of $140,000. The monthly target operating income is $70,000. What is Light Me Up Lamps' operating leverage factor at the target level of operating income?

Question

Quizplus · Accepted Answer

We can use the formula for operating leverage factor:

Operating Leverage Factor = Contribution Margin / Operating Income

Since the target operating income is $70,000, we can calculate the sales needed to achieve that level of income:

Operating Income = Sales - Variable Expenses - Fixed Expenses
$70,000 = Sales - 0.30Sales - $140,000
$210,000 = 0.70Sales
$300,000 = Sales

Now we can calculate the contribution margin:

Contribution Margin = Sales - Variable Expenses
Contribution Margin = $300,000 - 0.30($300,000)
Contribution Margin = $210,000

Finally, we can calculate the operating leverage factor:

Operating Leverage Factor = Contribution Margin / Operating Income
Operating Leverage Factor = $210,000 / $70,000
Operating Leverage Factor = 3.00

Therefore, the operating leverage factor at the target level of operating income is 3.00. The best choice is B.

Light Me Up Lamps Has Variable Expenses of 30% of Sales