Wham Company sells electronic squirrel repellants for $60.Variable costs are 60% of sales and total fixed costs are $40,000.What is the firm's magnitude of operating leverage if 2,000 units are sold?
A) 0.17
B) 6.00
C) 2.25
D) None of these

Question

Quizplus · Accepted Answer

Operating leverage is calculated as Contribution Margin / Net Operating Income. With a selling price of $60 and variable costs being 60% of sales, the variable cost per unit is $36 (60% of $60). The contribution margin per unit is therefore $24 ($60 - $36). For 2,000 units, total contribution margin is $48,000 (2000 units * $24/unit). Total fixed costs are $40,000, so Net Operating Income (NOI) is $8,000 ($48,000 - $40,000). Operating leverage is then $48,000 / $8,000 = 6. Therefore, the magnitude of operating leverage is 6.

Wham Company Sells Electronic Squirrel Repellants for $60