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16 June, 09:38

Light Me Up Lamps has variable expenses of 50 % of sales and monthly fixed expenses of $ 200 comma 000. The monthly target operating income is $ 30 comma 000. What is Light Me Up Lamps' operating leverage factor at the target level of operating income?

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  1. 16 June, 13:15
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    Operating Leverage Factor 7.67

    Explanation:

    Operating leverage factor is a very important measure of a company for forecasting growth. It shows the contribution margin that is necessary to gain against one $1 of operating income.

    Contribution margin Ratio = Fixed cost + Target operating Income

    Contribution Margin = $200,000 - 30,000 = $230,000

    Operating Leverage factor = Contribution margin / Target Operating Income

    Operating Leverage factor = $230,000 / $30,000 = 7.67
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