Question

Compute the degree of operating leverage for Magenta Company from the following information. (Round answer to one decimal place.)

Sales $500,000
Variable Expenses $200,000
Fixed expenses $100,000
a. 1.3
b. 1.5
c. 1.2
d. 1.6

Answer 1

The degree of operating leverage for Magenta Company is calculated by dividing operating income by the contribution margin.

Step-by-step explanation:

To compute the degree of operating leverage for Magenta Company, we need to understand the concept behind it. Operating leverage is a measure of how sensitive the company's operating income is to a change in sales volume. Calculating it involves determining the contribution margin, which is sales minus variable expenses, and then dividing the operation income by the contribution margin.

For Magenta Company, given the sales of $500,000 and variable expenses of $200,000, the contribution margin would be $500,000 - $200,000 = $300,000. The operating income is calculated by subtracting the fixed expenses from the contribution margin, so it would be $300,000 - $100,000 = $200,000. Now, the degree of operating leverage can be found by dividing the operating income by the contribution margin, which is $200,000 / $300,000 = 1.6667, rounded to one decimal place, it is 1.7. However, this is not one of the provided options, indicating there might be a mistake in the given answer choices or in the understanding of the formula.