Question

# Pure Water Products produces two types of water filters. One attaches to the faucet and cleans...

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.

Calculation for Degree of Operating Leverage :-

No. of Pitcher Filter sold = (11400/4)*3 = 8550

Last Year Income Statement :-

 Particulars Total Amount(\$) Faucet Pitcher filter Units 11400 8550 Sales((11400*\$70)+(8550*\$80)) 1482000 798000 684000 Less : Variable Cost ((11400*\$30)+(8550*\$45)) 726750 342000 384750 Contribution in \$ 755250 456000 299250 Contribution in % 50.96 57.14 43.75 Less : Fixed Cost 424000 Operating Income 331250

Degree of Operating Leverage = Contribution / Operating Income

= \$755250 / \$331250

= 2.28 times