Light Me Up Lamps has variable expenses of​ 30% of sales and monthly fixed expenses of​ $140,000. The monthly target operating income is​ $70,000. What is Light Me Up​ Lamps' operating leverage factor at the target level of operating​ income?A.1.50

Respuesta :

Answer:

Operating leverage = 3

Explanation:

First of all we need to understand, what is "operating leverage"?

Operating leverage

  • Cost-accounting formula
  • Measures the degree to which a firm or project can increase operating income by increasing revenue.
  • Business that generates sales with a high gross margin and low variable costs has high 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