Question

​Tom's Taxidermy has a monthly target operating income of $ 30 comma 000. Variable expenses are 75​% of sales and monthly fixed expenses are $ 15 comma 000. What is​ Tom's operating leverage factor at the target level of operating​ income?

Answer 1

Tom's operating leverage factor at the target level of operating​ income is 1.5

Step-by-step explanation:

contribution margin = operating income + fixed cost

= $30,000 + $15,000

= $45,000

The Operating income is expressed as the difference of the contribution margin and fixed costs. The contribution margin would therefore can also be expressed as the sum of the target operating income and fixed costs. This would then be used to the determine the operating leverage factor of the business

the operating leverage factor for the business is given by:

Operating leverage Factor = contribution margin/operating income

= $45,000/$30,000

= 1.5

Therefore, Tom's operating leverage factor at the target level of operating​ income is 1.5