Question

A university is planning to hold an event at a local venue, which will charge a fixed rental fee of $675 for the event plus $18.40 per guest for food. The university has budgeted $920 for administrative and marketing expenses. It plans to hire a band, which will cost another $510. Tickets are expected to sell for $41.80 per guest. Ignore taxes. What is the degree of operating leverage if 255 guests attend?

Question 25 options:

	1.55
	1.58
	1.62
	1.66
	1.70

Answer 1

Fixed costs:

Rental fees	$675
Administrative and marketing expense	920
Hiring band costs	510
Total fixed costs	$2,105

Contribution margin per unit = Sales per unit - Variable cost per unit

Contribution margin per unit = $41.8 - $18.4 = $23.4

Contribution margin = 255*$23.4 = $5,967

Operating leverage = Contribution margin / Operating income

Operating leverage = $5,967 / $3,862 ($5,967 - 2,105)

Operating leverage = 1.55

Hence option 1.55 is correct.