If sales are $400,000, variable costs are 80% of sales, and operating income is $40,000, what is the operating leverage?
A) 0
B) 7.500
C) 2.0
D) 1.333

Question

Quizplus · Accepted Answer

Operating leverage is the ratio of contribution margin to operating income.

Contribution margin = Sales - Variable costs

Contribution margin = $400,000 - ($400,000 x 0.80)

Contribution margin = $80,000

Operating leverage = Contribution margin / Operating income

Operating leverage = $80,000 / $40,000

Operating leverage = 2.0

Therefore, the answer is C) 2.0.

If Sales Are $400,000, Variable Costs Are 80% of Sales