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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 10perunitandvariablecostof10 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 .

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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 1010 - 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 415,000=4 * 15,000 = 60,000.

Step 3: Calculate the Operating Income. This is total Contribution Margin minus Fixed Costs. In this case, it's 60,00060,000 - 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 60,000/60,000 / 30,000 = 2.

So, the degree of operating leverage is 2.

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