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.