Answer:
Operating leverage = 3
Explanation:
First of all we need to understand, what is "operating leverage"?
Operating leverage
Important note
Please consider that the higher the degree of operating leverage, the greater the potential danger from forecasting risk, in which a relatively small error in forecasting sales can be magnified into large errors in cash flow projections.
Formula for operating leverage = [tex]\frac{Contribution margin}{Profit}[/tex]
This formula can be restated as follows:
Formula for operating leverage = [tex]\frac{Q*CM}{Q*CM - Fixed operating cost}[/tex]
Where:
Q = unit quantity
CM = Contribution margin (Price - variable cost)
Calculation of operating leverage
Operating leverage = ($140,000 + $70,000) / $70,000
Operating leverage = 3
Operating leverage = 2.4