Question

Schlictor company sells cordless razors for $50. Variable costs are 40% of sales and total fixed costs are $40,000. What is the firm's operating leverage if 2,000 units are sold?

Answer 1

Answer: Schlictor's operating leverage when 2000 units are sold is 3.

The degree of operating leverage is used to calculate the change in operating income with respect to a percentage change in sales.

We can calculate operating leverage of a firm with the help of the following formula:

`Degree of operating leverage = (Sales - Variable Costs)/(Sales - (Variable costs + Fixed Costs))`

Substituting the values from the question we get

`Degree of operating leverage = ((50 * 2000) - (50*0.40*2000))/([50*2000] - [(50*0.4*2000) + 40000])`

`Degree of operating leverage = (100000 - 40000)/([100000] - [(40000) + 40000])`

`Degree of operating leverage = (60000)/(20000)`

`Degree of operating leverage = 3`