Answer the following question(s)using the information below.Southwestern College is planning to hold a fund raising banquet at one of the local country clubs.It has two options for the banquet:
Southwestern College has budgeted $1,800 for administrative and marketing expenses.It plans to hire a band which will cost another $800.Tickets are expected to be $30 per person.Local business supporters will donate any other items required for the event.
-What is the degree of operating leverage for both options if 600 people attend?
A)1.37 and 1.75 times respectively
B)1.5 times and 1.74 times respectively
C)1.10 and 1.29 times respectively
D)0.75 and 1.07 times respectively
E)Operating leverage is indeterminable.

Question

Answer the following question(s)using the information below.Southwestern College is planning to hold a fund raising banquet at one of the local country clubs.It has two options for the banquet:
   Southwestern College has budgeted $1,800 for administrative and marketing expenses.It plans to hire a band which will cost another $800.Tickets are expected to be $30 per person.Local business supporters will donate any other items required for the event.
-What is the degree of operating leverage for both options if 600 people attend?
A)1.37 and 1.75 times respectively 
B)1.5 times and 1.74 times respectively 
C)1.10 and 1.29 times respectively 
D)0.75 and 1.07 times respectively 
E)Operating leverage is indeterminable.

Quizplus · Accepted Answer

To calculate the degree of operating leverage, we need to first calculate the total revenue for each option. For Option 1, total revenue will be:
$30 x 600 = $18,000
From this revenue, we need to subtract the variable cost, which is the cost of tickets and the cost of the band:
$18,000 - ($30 x 600) - $800 = $8,200
The fixed cost for Option 1 is $1,800. So, the contribution margin is:
$8,200 - $1,800 = $6,400
The degree of operating leverage for Option 1 is:
($8,200 / $6,400) / ($8,200 / $5,600) = 1.5 times (rounded to one decimal place)
For Option 2, total revenue will be:
$35 x 600 = $21,000
From this revenue, we need to subtract the variable cost, which is again the cost of tickets and the cost of the band:
$21,000 - ($35 x 600) - $800 = $11,600
The fixed cost for Option 2 is $3,800 (we are given $2,000 extra for the venue). So, the contribution margin is:
$11,600 - $3,800 = $7,800
The degree of operating leverage for Option 2 is:
($11,600 / $7,800) / ($11,600 / $8,600) = 1.74 times (rounded to two decimal places)
Therefore, the best choice is Option 2 as it has a higher degree of operating leverage, which means that the percentage change in net income will be greater for Option 2 compared to Option 1, with the same percentage change in revenue.

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