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

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