J&A Corporation has a monthly target operating income of $57,600. Variable expenses are 10% of sales and monthly fixed expenses are $14,400. What is J&A's operating leverage factor at the target level of operating income?

Question

Quizplus · Accepted Answer

Operating leverage factor = Contribution margin ÷ Operating income

Contribution margin = Sales – Variable expenses
Fixed expenses are not considered in the calculation of contribution margin.

Let X be the amount of sales needed to achieve the target operating income.

Target operating income = X - 0.1X - $14,400
$57,600 = 0.9X - $14,400
$72,000 = 0.9X
X = $80,000

Therefore, contribution margin = $80,000 - 0.1($80,000) = $72,000

Operating leverage factor = $72,000 ÷ $57,600 = 1.25

Therefore, the correct answer is D) 5.00

J&A Corporation Has a Monthly Target Operating Income of $57,600