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Southwest Electric Co-op has variable expenses of 20% of sales and monthly fixed expenses of $150,000. The monthly target operating income is $50,000.
-What is Southwest Electric Co-op's operating leverage factor at the target level of operating income?

Question

Quizplus · Accepted Answer

Operating leverage is calculated as Contribution Margin / Operating Income. First, find the sales needed to achieve the target operating income. Let S = sales. Variable expenses = 20% of S, so 0.20S. Fixed expenses are $150,000. The target operating income is $50,000. The equation for operating income is Sales - Variable Expenses - Fixed Expenses = Operating Income. Plugging in the numbers: S - 0.20S - $150,000 = $50,000. Simplifying, 0.80S = $200,000, so S = $250,000. Contribution margin at this sales level is $250,000 - 0.20($250,000) = $250,000 - $50,000 = $200,000. Therefore, the operating leverage factor is $200,000 / $50,000 = 4.00.

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