Question

Great Cruiseline offers nightly dinner cruises off the coast of​ Miami, San​ Francisco, and Seattle. Dinner cruise tickets sell for $ 50 per passenger. Great ​Cruiseline's variable cost of providing the dinner is $ 20 per​ passenger, and the fixed cost of operating the vessels​ (depreciation, salaries, docking​ fees, and other​ expenses) is $ 270000 per month. The​ company's relevant range extends to 16000 monthly passengers. The breakeven sales are 9000 tickets sold.

a. Compute the operating leverage factor when Great Cruiseline sells 12000 dinner cruises.   

b. If volume increases by 8​%, by what percentage will operating income​ increase?

c. If volume decreases by 5​%, by what percentage will operating income​ decrease?

Answer 1

a. Operating leverage factor =

Contributionmargin/Operating income

Where contribution margin = sale price - variable cost = $50-$20 = $30 per unit

Total contribution margin = 30x12000 = $360000

Operating income = contribution - fixed cost

= 360000 - 270000 = 90000

Operating Leverage factor = 360000/90000 = 4

b. % Increase in operating income =

(% increase in sales) x (operating leverage factor)

= 8% x 4 = 32%

c. % Decrease in operating income = 5% x 4 = 20%

Note: Changes in volume are within the relevant range.