Question

Turner Company's contribution margin ratio is 15%. If the degree of operating leverage is 12 at the $150,000 sales level, net operating income at the $150,000 sales level must equal:

[[selectone]]

a. $1,500

b. $1,875

c. $2,700

d. $2,160

Answer 1

Ans) (b) Net Operating Income = $1,875

Calculation of Net Operating Income @Sales level of $1,50,000

[For Understanding Purpose : Operating Leverage is the ratio of Contribution to Net Operating Income. The said ratio is calculated to analyse the overall cost structure of the Company with a view to determine percentage of fixed costs in relation to its total costs (which comprises of Variable cost + Fixed Cost). This will help the company in taking decision that how well it can use it fixed cost to generate profits.]

Operating Leverage = Contribution / Net Operating Income

12 = $22,500(W.N.1) / Net Operating income

Net Operating Income = $22,500/12

Net Operating Income = $1,875

W.N.1) Calculation of Contribution earned@Sales level of $1,50,000

Contribution Earned = Sales*Contribution Margin Ratio

= $1,50,000*15%

= $22,500