If sales are $400,000, variable costs are 75% of sales, and operating income is $50,000, what is the operating leverage?
A) 2.5
B) 7.5
C) 2.0
D) 0

Question

Quizplus · Accepted Answer

Operating leverage is calculated as the percentage change in operating income for a percentage change in sales revenue.

Using the formula: Operating Leverage = Contribution Margin / Operating Income

And, Contribution margin = Sales - Variable costs

Hence, Contribution Margin = $400,000 - (0.75 x $400,000) = $100,000

Operating Leverage = $100,000 / $50,000 = 2.0

Therefore, the answer is C.

If Sales Are $400,000, Variable Costs Are 75% of Sales