Question

Fire Company is a service firm with current service revenue of $900,000 and a 40% contribution margin.

Its fixed costs are $200,000. Ice Company has current sales of $420,000 and a 30% contribution margin.

Its fixed costs are $90,00.

What is the degree of operating leverage for Fire Company? and for the Ice Company?

Answer 1

Judging by the commas in Fixed cost of Ice company i have taken fixed cost as $90,000 instead of 9000.

Solution

	Operating leverage
Fire Company	2.25
Ice Company	3.50

Working

	Fire Company	Ice Company
Sales	$ 900,000.00	$420,000.00
Variable costs	$ 540,000.00	$294,000.00
Contribution margin	$ 360,000.00	$126,000.00
Fixed costs	$ 200,000.00	$ 90,000.00
Operating Income	$ 160,000.00	$ 36,000.00
Operating leverage	2.3	3.5

Operating leverage = Contribution margin/Operating income.