Question

Tunneling Inc. fixed costs are at $100,000. The company has sales of 10,000 units with a price of $84 and variable cost per unit of $40. The depreciation is $50,000 and taxes are 21 percent. What is the degree of operating leverage

Answer 1

Tunneling Inc.

Degree of operating leverage

= Contribution Margin divided by Operating Income

= $440,000/$290,000 = 1.52

Step-by-step explanation:

(a) Data and Calculations:

Sales Revenue = $840,000 (10,000 x $84)

Variable cost = $400,000 (10,000 x $40)

Contribution = $440,000

Fixed costs = $100,000

Depreciation = $50,000

Operating Income = $290,000

Tax (21%) ($60,900)

Net Income = $229,100

(b) The degree of operating leverage for Tunneling Inc. is 1.52. It shows the financial impact of a change in sales revenue on Tunneling Inc.'s earnings. Analysts usually work this ratio out to determine this important effect.