Great Cruiseline offers nightly dinner cruises off the coast

Great Cruiseline offers nightly dinner cruises off the coast of Miami, San Francisco, and Seattle. Dinner cruise tickets sell for $ 50 per passenger. Great Cruiseline\'s variable cost of providing the dinner is $ 20 per passenger, and the fixed cost of operating the vessels (depreciation, salaries, docking fees, and other expenses) is $ 270000 per month. The company\'s relevant range extends to 16000 monthly passengers. The breakeven sales are 9000 tickets sold.

a. Compute the operating leverage factor when Great Cruiseline sells 12000 dinner cruises.

b. If volume increases by 8%, by what percentage will operating income increase?

c. If volume decreases by 5%, by what percentage will operating income decrease?

Solution

a. Operating leverage factor =

Contributionmargin/Operating income

Where contribution margin = sale price - variable cost = $50-$20 = $30 per unit

Total contribution margin = 30x12000 = $360000

Operating income = contribution - fixed cost

= 360000 - 270000 = 90000

Operating Leverage factor = 360000/90000 = 4

b. % Increase in operating income =

(% increase in sales) x (operating leverage factor)

= 8% x 4 = 32%

c. % Decrease in operating income = 5% x 4 = 20%

Note: Changes in volume are within the relevant range.