Question

Jefferson Company has sales of 2,000 units at $30 per unit. Variable expenses are 40% of the selling price. If total fixed expenses are $20,000, the degree of operating leverage is:

A. 2.25
B. 3.16
C. 2.50
D. 5.00

Answer 1

The degree of operating leverage for Jefferson Company, with given sales and cost data, is calculated as 2.25, which is option A.

Step-by-step explanation:

Before we can calculate the degree of operating leverage, we need to calculate the contribution margin per unit. The contribution margin per unit is the difference between the selling price per unit and the variable costs per unit. The degree of operating leverage (DOL) can be calculated using the formula DOL = (Q x (P - V)) / (Q x (P - V) - F), where Q is the quantity sold, P is the selling price per unit, V is the variable cost per unit, and F is the total fixed costs. In the Jefferson Company's scenario, we have Q = 2,000 units, P = $30, V = 40% of P (which is $12), and F = $20,000. Plugging these values into the formula gives us:

• Quantity Sold (Q): 2,000 units
• Selling Price (P): $30 per unit
• Variable Cost (V): $12 per unit (40% of $30)
• Total Fixed Costs (F): $20,000

Therefore, DOL = (2,000 x ($30 - $12)) / (2,000 x ($30 - $12) - $20,000) = (2,000 x $18) / (2,000 x $18 - $20,000) = $36,000 / $16,000 = 2.25.

Thus, the correct degree of operating leverage for Jefferson Company is 2.25, which corresponds to option A.