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Operating Leverage

Decatur Company reports the following data:
Sales - $526,500
Variable costs - 363,300
Fixed costs - 122,400
Determine Decatur Company's operating leverage. Round your answer to one decimal place.

User RLH
by
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1 Answer

1 vote

Final answer:

Decatur Company's operating leverage is calculated by dividing the contribution margin by the operating income. With sales of $526,500, variable costs of $363,300, and fixed costs of $122,400, the company's operating leverage is 4.0 when rounded to one decimal place.

Step-by-step explanation:

The question asks us to determine Decatur Company's operating leverage. Operating leverage measures a company's fixed costs as a percentage of its total costs. It helps determine how a company's operating income will change in response to a change in sales. To calculate the operating leverage, we can use the following formula:



Operating Leverage = Contribution Margin / Operating Income


Where the contribution margin is calculated by subtracting variable costs from sales, and operating income is the contribution margin minus fixed costs.

For Decatur Company, the sales are $526,500, variable costs are $363,300, and fixed costs are $122,400. First, we find the contribution margin:



Contribution Margin = Sales - Variable Costs

Contribution Margin = $526,500 - $363,300

Contribution Margin = $163,200


Next, we calculate the operating income:


Operating Income = Contribution Margin - Fixed Costs

Operating Income = $163,200 - $122,400

Operating Income = $40,800

Finally, we compute the operating leverage:

Operating Leverage = Contribution Margin / Operating Income

Operating Leverage = $163,200 / $40,800

Operating Leverage = 4.0


Therefore, Decatur Company's operating leverage is 4.0, rounded to one decimal place.

User Jubatian
by
8.2k points
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