Question

Dragon company has sales of 500000 variable costs are 75% of sales and operating income is 40000 what is dragons operating leverage?

a. 1.25
b. 1.3
c. 0
d. 3.1

Answer 1

To calculate the operating leverage, you subtract the variable costs from sales to find the contribution margin, then divide the operating income by the contribution margin. Adding one to this quotient gives an operating leverage of b. 1.3 for Dragon Company.

Step-by-step explanation:

Calculating Operating Leverage for Dragon Company

Operating leverage reflects the proportion of fixed costs in a company's cost structure and indicates how a change in sales volume will affect operating income. To calculate Dragon Company's operating leverage, you need to first determine its contribution margin (sales minus variable costs) and then divide the operating income by the contribution margin. Here are the steps:

1. 
   
3. Find the contribution margin: 500,000 (sales) - (75% of 500,000) variable costs = 500,000 - 375,000 = 125,000.
4. 
   
6. Divide the operating income by the contribution margin: 40,000 / 125,000 = 0.32.
7. 
   
9. Calculate the operating leverage: Since the operating leverage is 1 plus this quotient, the operating leverage is 1 + 0.32 = 1.32.

Therefore, the correct answer to the question, "What is Dragon's operating leverage?" is b. 1.3.