Julia's Catering has a monthly target operating income of $6,000.Variable expenses are 40% of sales and monthly fixed expenses are $3,600.What is Julia'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 
Given that variable expenses are 40% of sales, contribution margin is 60% of sales.

To find the sales needed to achieve the target operating income of $6,000:

Target operating income = Sales - Variable expenses - Fixed expenses 
$6,000 = 0.6S - 3,600 
0.6S = $9,600 
S = $16,000

Now, we can calculate the contribution margin:

Contribution margin = 0.6S 
Contribution margin = 0.6 x $16,000 
Contribution margin = $9,600

Finally, we can calculate the operating leverage factor:

Operating leverage factor = Contribution margin / Operating income 
Operating leverage factor = $9,600 / $6,000 
Operating leverage factor = 1.6

Therefore, the answer is C.

Julia's Catering Has a Monthly Target Operating Income of $6,000