Fill in the Blank QuestionFill in the blank question.RST Company produces a product that has a selling price of $10 per unit and variable cost of $6 per unit. The company's fixed costs are $30,000. If the company sells 15,000 units, the degree of operating leverage is .
Question
Fill in the Blank QuestionFill in the blank question.RST Company produces a product that has a selling price of 6 per unit. The company's fixed costs are $30,000. If the company sells 15,000 units, the degree of operating leverage is .
Solution
To answer this question, we first need to understand what operating leverage is. Operating leverage is a measure of how sensitive a company's operating income is to its variable costs. It is calculated as Contribution Margin divided by Operating Income.
Step 1: Calculate the Contribution Margin per unit. This is Selling Price per unit minus Variable Cost per unit. In this case, it's 6 = $4 per unit.
Step 2: Calculate the total Contribution Margin. This is Contribution Margin per unit times the number of units sold. In this case, it's 60,000.
Step 3: Calculate the Operating Income. This is total Contribution Margin minus Fixed Costs. In this case, it's 30,000 = $30,000.
Step 4: Calculate the Degree of Operating Leverage. This is Contribution Margin divided by Operating Income. In this case, it's 30,000 = 2.
So, the degree of operating leverage is 2.
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