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Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094

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BuyFindarrow_forward

Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094
Textbook Problem

Operating leverage

Westminster Co. reports the following data:

Sales $875,000
Variable costs 425,000
Contribution margin $450,000
Fixed costs 150,000
Income from operators $300,000

Determine Westminster Co.’s operating leverage.

To determine

Operating leverage: It is a ratio that measures the proportion of fixed cost on the total costs and the extent to which the changes in the sales volume affects the income from operations. It shows the relationship between the contribution margin and income from operations. The formula to calculate the operating leverage is as follows:

 Operatingleverage=ContributionMarginIncomefromoperations

To determine: W Company’s operating leverage.

Explanation

Determine W Company’s operating leverage.

Contribution margin =$450,000

Income from operations =$300,000

 Operatingleverage=ContributionMargin

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