Question

Pure Water Products produces two types of water filters. One attaches to the faucet and cleans all water
that passes through the faucet. The other is a pitcher-filter that only purifies water meant for drinking.
Revenue and cost information for each product appears below:

●      the unit that attaches to the faucet is sold for $70 and has variable costs of $30

●     the pitcher-filter sells for $80 and has variable costs of $45

●     fixed costs total $424,000

●     Pure Water sells 4 faucet models for every 3 pitcher-filters sold

Assume that last year, the company sold 11,400 faucet-models.

Calculate the degree of operating leverage reported by Pure Water Products last year. Enter your
answer with two places after the decimal point.

Answer 1

sales-mix equation:

4 faucet models = 3 pitcher-filters sold

4 *11,400 = 3 pitcher-filters

45600 = 3 pitcher-filters

15200 = pitcher-filters

company sold 11,400 faucet-models, therefore sold unis of pitcher-filter were 15200

Total sales:

  pitcher-filter [$80 * 15200] =1216000

faucet models[$70 * 11400] = 798000

=2014000

Total Variable cost :

pitcher-filter [$45 * 15200] =684000

faucet models[$30 * 11400] = 342000

=1026000

degree of operating leverage = Contribution margin / [contribution margin - fixed cost]

= [2014000 - 1026000] /   [2014000 - 1026000 - 424000]

= 988000 / 564000

=1.75