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?

Question

Business

Krista Moyer

7 September, 05:24

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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Answers (1)

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Tyson Shea · Answer 1

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