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Chapter 20: Q25RQ (page 1120)

What is operating leverage? What does it mean if a company has a degree of operating leverage of 3?

Short Answer

Expert verified

The change will be more operating income than sales.

Step by step solution

01

Meaning of operating leverage

The change in operating income when sales volume changes due to a change in fixed costs is known as operating leverage.

02

What does it mean if a company has a degree of operating leverage of 3?

The degree of operating leverage of 3 means that the percentage variation in operating income will be three times the percentage in sales.

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Most popular questions from this chapter

Mi Tierra Driving School charges \(680 per student to prepare and administer written and driving tests. Variable costs of \)408 per student include trainers’ wages, study materials, and gasoline. Annual fixed costs of \(63,920 include the training facility and fleet of cars.

Requirements

1. For each of the following independent situations, calculate the contribution margin per unit and the breakeven point in units by first referring to the original data provided:

a. Breakeven point with no change in information.

b. Decrease sales price to \)544 per student.

c. Decrease variable costs to \(340 per student.

d. Decrease fixed costs to \)53,040.

2. Compare the impact of changes in the sales price, variable costs, and fixed costs on the contribution margin per unit and the breakeven point in units.

What are the CVP assumptions?

Question: Computing contribution margin, units and required sales to break even, and units to achieve target profit

Compute the missing amounts for the following table.

A B C Sales price per unit \( 200 \) 4,000 $ 5,220 Variable costs per unit 80 1,000 2,088 Total fixed costs 73,200 660,000 3,758,400 Target profit 266,760 3,000,000 3,132,000 Calculate:                          

Contribution margin per unit                          

Contribution margin ratio                          

Required units to break even                          

Required sales dollars to break even

Required units to achieve target profit

What is the purpose of using the high-low method?

What is the relevant range?
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