If sales are $500,000, variable costs are 75% of sales, and operating income is $40,000, what is the operating leverage?
A) 0
B) 1.25
C) 1.3
D) 3.1

Question

Quizplus · Accepted Answer

Operating leverage is calculated as Contribution Margin / Operating Income. Contribution Margin = Sales - Variable Costs = $500,000 - (0.75 * $500,000) = $125,000. Operating leverage = $125,000 / $40,000 = 3.125, which rounds to 3.1.

If Sales Are $500,000, Variable Costs Are 75% of Sales