QUESTION 20 Gyro Company sells its only product for $77. Variable costs per unit are $35. Total fixed costs are $340,000. The company is currently selling 12,000 units. Determine the operating leverage factor at this level of sales. Round to two decimals.
QUESTION 20 Gyro Company sells its only product for $77. Variable costs per unit are $35. Total fixed costs are $340,000. The company is currently selling 12,000 units. Determine the operating leverage factor at this level of sales. Round to two decimals.
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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![### Question 20
Gyro Company sells its only product for $77. Variable costs per unit are $35. Total fixed costs are $340,000. The company is currently selling 12,000 units. Determine the operating leverage factor at this level of sales.
Round to two decimals.
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**Explanation:**
In this problem, you are required to determine the operating leverage factor, which is a measure of how revenue growth translates to growth in operating income. The formula for the degree of operating leverage (DOL) is:
\[ \text{DOL} = \frac{\text{Contribution Margin}}{\text{Net Operating Income}} \]
To determine the contribution margin:
1. **Contribution Margin per Unit:**
\[ \text{Selling Price per Unit} - \text{Variable Cost per Unit} \]
\[ = \$77 - \$35 \]
\[ = \$42 \]
2. **Total Contribution Margin:**
\[ \text{Contribution Margin per Unit} \times \text{Number of Units Sold} \]
\[ = \$42 \times 12,000 \]
\[ = \$504,000 \]
To determine the net operating income:
3. **Net Operating Income:**
\[ \text{Total Contribution Margin} - \text{Total Fixed Costs} \]
\[ = \$504,000 - \$340,000 \]
\[ = \$164,000 \]
Finally, we calculate the DOL:
4. **Operating Leverage Factor:**
\[ \text{DOL} = \frac{\$504,000}{\$164,000} \]
\[ = 3.07 \]
Therefore, the operating leverage factor at the current level of sales is **3.07**.](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F5c8d4a85-4f6d-419d-9725-6a01dd6ff781%2F268e1075-01c8-4d84-8fa3-f74c614d8cf2%2Fd4p6y6h_processed.jpeg&w=3840&q=75)
Transcribed Image Text:### Question 20
Gyro Company sells its only product for $77. Variable costs per unit are $35. Total fixed costs are $340,000. The company is currently selling 12,000 units. Determine the operating leverage factor at this level of sales.
Round to two decimals.
[Text Box for Answer]
---
**Click Save and Submit to save and submit. Click Save All Answers to save all answers.**
---
**Explanation:**
In this problem, you are required to determine the operating leverage factor, which is a measure of how revenue growth translates to growth in operating income. The formula for the degree of operating leverage (DOL) is:
\[ \text{DOL} = \frac{\text{Contribution Margin}}{\text{Net Operating Income}} \]
To determine the contribution margin:
1. **Contribution Margin per Unit:**
\[ \text{Selling Price per Unit} - \text{Variable Cost per Unit} \]
\[ = \$77 - \$35 \]
\[ = \$42 \]
2. **Total Contribution Margin:**
\[ \text{Contribution Margin per Unit} \times \text{Number of Units Sold} \]
\[ = \$42 \times 12,000 \]
\[ = \$504,000 \]
To determine the net operating income:
3. **Net Operating Income:**
\[ \text{Total Contribution Margin} - \text{Total Fixed Costs} \]
\[ = \$504,000 - \$340,000 \]
\[ = \$164,000 \]
Finally, we calculate the DOL:
4. **Operating Leverage Factor:**
\[ \text{DOL} = \frac{\$504,000}{\$164,000} \]
\[ = 3.07 \]
Therefore, the operating leverage factor at the current level of sales is **3.07**.
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