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Chapter 20: 15SE (page 1087)

Use the following information to complete Short Exercises S20-10 through S20-15.

Funday Park competes with Cool World by providing a variety of rides. Funday Park sells tickets at \(70 per person as a one-day entrance fee. Variable costs are \)42 per person, and fixed costs are $170,800 per month.

S20-15 Computing degree of operating leverage

Refer to the original information (ignoring the changes considered in Short Exercises S20-12 and S20-13). If Funday Park expects to sell 8,100 tickets, compute the degree of operating leverage (round to two decimal places). Estimate the operating income if sales increase by 15%.

Short Answer

Expert verified

The degree of operating leverage is 4.05.

Step by step solution

01

Calculation of Contribution margin

Contributionmargin=Salesprice–Variablecost=$70-$42=$28

02

Calculation of degree of Operating leverage

Degreeofoperatingleverage=ContributionmarginOperatingincome=$28×8,100$28×8,100-$170,800=$226,800$56,000=4.05

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Most popular questions from this chapter

What effect does an increase in sales price have on contribution margin? An increase in fixed costs? An increase in variable costs?

A chain of convenience stores has one manager per store who is paid a monthly salary. Relative to the number of stores, is the manager’s salary fixed or variable? Why?

Identifying variable, fixed, and mixed costs Holly’s Day Care has been in operation for several years. Identify each cost as variable (V), fixed (F), or mixed (M), relative to number of students enrolled.

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England Productions performs London shows. The average show sells 1,300 tickets at\(60 per ticket. There are 175 shows per year. No additional shows can be held as thetheater is also used by other production companies. The average show has a cast of65, each earning a net average of \)340 per show. The cast is paid after each show. Theother variable cost is a program-printing cost of \(8 per guest. Annual fixed costs total\)728,000.

Requirements

1. Compute revenue and variable costs for each show.

2. Use the equation approach to compute the number of shows England Productionsmust perform each year to break even.

3. Use the contribution margin ratio approach to compute the number of showsneeded each year to earn a profit of $5,687,500. Is this profit goal realistic? Giveyour reasoning.

4. Prepare England Productions’s contribution margin income statement for175 shows performed in 2018. Report only two categories of costs: variableand fixed.

What is the relevant range?
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