Yellow Companys variable expenses are 20 of sales and have m

Yellow Company\'s variable expenses are 20% of sales and have monthly fixed expenses of $6,000. The monthly target operating income is $11,200. What is Yellow Company\'s operating leverage factor at the target level of operating income? A. 0.41 B. 2.43 C. 1.7 D. 1.94

Solution

ANS

OPERATING LEVERAGE = CONTRIBUTION / OPERATING INCOME

OPERATING INCOME = $11,200

FIXED EXPENSES = $6,000

CONTRIBUTION = OPERATING INCOME + FIXED EXPENSES

CONTRIBUTION = $11,200 + $6,000 = $17,200

OPERATING LEVERAGE = $17,200 / $11,200

= 1.5357 = 1.54 (ROUNDED OFF)