Magnitude of Operating Leverage: Conceptual
Operating Leverage states that a change in revenue creates a disproportionate change in
Net Income
Green Company has Sales Revenue of $99,000 and Variable Costs of $44,000. If Net Income is $16,000, what is the Magnitude of Operating Leverage?
$2.75
Month Machine Hours Maintenance Cost
January 22,750 $55,750
February 19,000 $57,000
March 28,500 $74,750
April 32,500 $84,000
May 29,000 $78,500
June 34,000 $93,000
July 30,000 $80,250
What two months (four values) from this table would be used in the high-low method?
June : 34,000 hours & $93,000
February: 19,000 hours & $57,000
Purple Company sells 5,000 units with a fixed cost of $22,000 and a variable cost per unit of $6. Purple plans to sell at $10 per unit. What is the break-even point in units using the contribution margin per unit method?
5,500 units
What is the equation for Contribution Margin Ratio?
Contribution Margin / Sales
What is the formula for Magnitude of Operating Leverage?
Contribution Margin/Net Income
Yellow Company has a Contribution Margin of $65,000 and fixed costs of $20,000. What is the Magnitude of Operating Leverage?
$1.44
What is the formula for Estimated Variable Cost Per Unit using the High-Low Method?
Change in Dollars / Change in Quantity
Purple Company sells 5,000 units with a fixed cost of $22,000 and a variable cost per unit of $6. Purple plans to sell at $10 per unit. What is the break-even point in dollars using the contribution margin ratio method?
$55,000
What is the equation for Break-Even in Dollars?
Fixed Cost / Contribution Margin Ratio
The ______ the MOL, the more sensitive Net Income is to a change in revenue
Higher
Purple Company had sales revenue of $200,000, variable costs of $90,000, and fixed costs of $50,000, What is the Magnitude of Operating Leverage?
$1.83
Month Machine Hours Maintenance Cost
January 22,750 $55,750
February 19,000 $57,000
March 28,500 $74,750
April 32,500 $84,000
May 29,000 $78,500
June 34,000 $93,000
July 30,000 $80,250
Use the high-low method to determine the estimated variable cost per unit.
$2.40 per unit
Green company sells units at a price of $410 per unit with a variable cost of $245 per unit. Fixed costs are estimated to be $13,200. What is the break-even point in units using the Equation Method?
80 units
What is the equation for Break-Even in Units?
Fixed Cost / Contribution Margin per Unit
What type of cost is necessary for Operating Leverage?
Fixed Cost
Red Company sold 9,500 units in the past year. This resulted in sales revenue of $175,000, fixed costs of $48,000, and the variable cost per unit was $10. What is the Magnitude of Operating Leverage?
$2.50
Month Machine Hours Maintenance Cost
January 22,750 $55,750
February 19,000 $57,000
March 28,500 $74,750
April 32,500 $84,000
May 29,000 $78,500
June 34,000 $93,000
July 30,000 $80,250
Use the high-low method to determine the estimated total fixed cost
$11,400
Gold Company sells 5,000 units at $75 per unit with variable costs of $35 per unit. Estimated fixed costs are $38,000. If Gold Company has a desired profit of $45,000, what is the sales volume necessary to reach the desired profit?
2,075 units
What is the equation to determine Sales Volume in Units required to earn a Desired Profit?
(Fixed Costs + Desired Profit) / Contribution Margin per Unit
If fixed costs increased, the Magnitude of Operating Leverage would
Increase
Orange Company sold 10,000 units in the past year. This resulted in sales revenue of $150,000, fixed costs of $42,500, and the variable cost per unit was $7. What is the Magnitude of Operating Leverage?
$2.13
Month Machine Hours Maintenance Cost
January 22,750 $55,750
February 19,000 $57,000
March 28,500 $74,750
April 32,500 $84,000
May 29,000 $78,500
June 34,000 $93,000
July 30,000 $80,250
Use the results of the high-low method to estimate machine maintenance cost for ----- hours
$78,600
Gold Company sells 5,000 units at $75 per unit with variable costs of $35 per unit. Estimated fixed costs are $38,000. If Gold Company has a desired profit of $45,000, what is the amount of sales dollars necessary to reach the desired profit?
$155,625
What is the equation to determine Sales Volume in Dollars required to earn a Desired Profit?
(Fixed Costs + Desired Profit) / Contribution Margin Ratio