QQuestionBusiness Management
QuestionBusiness Management
"Degree of Operating Leverage
Head-First Company plans to sell 5,000 bicycle helmets at $75 each in the coming year. Unit variable cost is $45 (includes direct materials, direct labor, variable factory overhead, and variable selling expense). Total fixed cost equals $49,500 (includes fixed factory overhead and fixed selling and administrative expense). Operating income at 5,000 units sold is $100,500.
Required:
Calculate the degree of operating leverage. Round the answer to one decimal place.
fill in the blank 1"
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Answer
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Step 1:: First, let's calculate the contribution margin per unit.
Contribution margin is the difference between the selling price and the variable cost per unit. Contribution Margin per unit = Selling Price - Variable Cost per unit Contribution Margin per unit = $30
Step 2:: Next, we'll calculate the contribution margin, which is the contribution margin per unit multiplied by the number of units sold.
Contribution Margin = Contribution Margin per unit * Units sold Contribution Margin = $30 \times 5000 Contribution Margin = $150,000
Step 3:: Now, we can calculate the degree of operating leverage (DOL) using the formula:
DOL = $150,000 / $100,500
DOL = Contribution Margin / Operating Income We already have the Contribution Margin from Step 2 and the Operating Income is given as $100,500.
Step 4:: Calculate the value of DOL.
DOL ≈ 1.49
Final Answer
The degree of operating leverage is approximately 1.49.
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