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27 August, 06:34

The following income statement is provided for Vargas, Inc. Sales revenue (2,500 units * $60 per unit) $ 150,000 Cost of goods sold (variable; 2,500 units * $20 per unit) (50,000) Cost of goods sold (fixed) (8,000) Gross margin 92,000 Administrative salaries (42,000) Depreciation (10,000) Supplies (2,500 units * $4 per unit) (10,000) Net income $ 30,000 What is this company's magnitude of operating leverage?

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  1. 27 August, 09:54
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    The correct answer is 3.

    Explanation:

    According to the scenario, the computation of the given data are as follows:

    Variable cost = Cost of goods sold (variable) + Supplies

    = $50,000 + $10,000 = $60,000

    Fixed cost = Cost of goods sold (fixed) + Administrative salaries + Depreciation

    = $8,000 + $42,000 + $10,000 = $60,000

    So, we can calculate the operating leverage by using following formula:

    Operating leverage = Contribution margin : Net operating income

    Where, Contribution Margin = Sales revenue - Variable cost

    = $150,000 - $60,000 = $90,000

    And Net operating income = Contribution Margin - Fixed Cost

    = $90,000 - $60,000 = $30,000

    By putting the value, we get

    Operating leverage = $90,000 : $30,000

    = 3
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