Question

Degree of Operating Leverage Chillmax Company plans to sell 3,500 pairs of shoes at $60 each in the coming year. Unit variable cost is $21 (includes direct materials, direct labor, variable factory overhead, and variable selling expense). Total fixed cost equals $78,000 (includes fixed factory overhead and fixed selling and administrative expense). Operating income at 3,500 units sold is $58,500. Required: Calculate the degree of operating leverage. Note: Round answer to one decimal place.

Answer 1

The degree of operating leverage for Chillmax Company is 0.81.

Step-by-step explanation:

To calculate the degree of operating leverage (DOL), we need to use the formula: DOL = (operating income + operating income + fixed costs).

First, we need to calculate the operating income at the given level of units sold. The selling price per pair of shoes is $60, and the unit variable cost is $21. So the contribution margin per unit is $60 minus $21 = $39.

Now, we can calculate the operating income at 3,500 units sold. The total contribution margin is $39 * 3,500 = $136,500. Deducting the fixed costs of $78,000, we get the operating income of $136,500 minus $78,000, or $58,500.

Finally, we can calculate the degree of operating leverage: DOL = $58,500 / ($58,500 - $78,000) = 0.81 (rounded to one decimal place).