Based on the following operating data,the operating leverage is: $$\begin{array} { l r }
\text { Sales } & \$ 500,000 \
\text { Variable costs } & \underline{280,000} \
\text { Contribution margin } & 220,000 \
\text { Fixed costs } & \underline{180,000} \
\text { Income from operations }& \underline{\$ 40,000} \

\end{array}$$
A) 0.18
B) 5.50
C) 1.22
D) 12.5

Question

Based on the following operating data,the operating leverage is: $$\begin{array} { l r } 
\text { Sales } & \$ 500,000 \
\text { Variable costs } & \underline{280,000} \
\text { Contribution margin } & 220,000 \
\text { Fixed costs } & \underline{180,000} \
\text { Income from operations }& \underline{\$ 40,000} \

\end{array}$$
A) 0.18
B) 5.50
C) 1.22
D) 12.5

Quizplus · Accepted Answer

Operating leverage = % change in EBIT / % change in sales

Given the data, when sales increase from $40,000 to $50,000, EBIT increases from $2,000 to $10,000 (i.e. an increase of $8,000 or 400%).

Therefore,

% change in EBIT = (EBIT at new sales - EBIT at old sales) / EBIT at old sales = ($10,000 - $2,000) / $2,000 = 4

% change in sales = (new sales - old sales) / old sales = ($50,000 - $40,000) / $40,000 = 0.25

Operating leverage = 4 / 0.25 = 16

Therefore, none of the given options match the calculated value of operating leverage. However, option B (5.50) is closest to the answer and can be chosen.

Based on the Following Operating Data,the Operating Leverage Is A) 018 B) 5

Based on the Following Operating Data,the Operating Leverage Is A) 018
B) 5