Operating Leverage

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Operating Leverage Questions and Answers

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Smith Company has a degree of operating leverage of 5, while Johnson Company has a degree of operating leverage of 2. Supplied with this knowledge, which response is most typical of Johnson Company?
Schlictor Company sells cordless razors for $50. Variable costs are 40% of sales and total fixed costs are $40,000. What is the firm's operating leverage if 2,000 units are sold?
May Clothing is a retail men's clothing store. May's cost is $20 per shirt. The sales price is $40 per shirt. They plan to sell 400,000 shirts each year, which at this level would result in before-...
Last month when Holiday Creations, Inc., sold 36,000 units, total sales were $304,000, total variable expenses were $221,920, and fixed expenses were $36,100. a. What is the company's contribution...
J&A Corporation has a monthly target operating income of $40,600. Variable expenses are 30% of sales and monthly fixed expenses are $8,400. What is J&A's operating leverage factor at the target lev...
Modern Artifacts can produce keepsakes that will be sold for $130 each. Non-depreciation fixed costs are $2,000 per year, and variable costs are $80 per unit. The initial investment of $6,000 will...
Assume Paper Mate company is planning to introduce a new executive pen hat can be manufactured using either a capital4ntensive method or a labor-intensive method. The estimated manufacturing costs...
Consolidated Industries operates in five different industries and includes five separate divisions within its operating structure. Select information for each of these divisions follows. Required:...
Steeler Insulators is analyzing a new type of insulation for interior walls. The initial fixed asset requirement is $1.3 million, which would be depreciated straight-line to zero over the 12-year l...
At an output level of 78,000 units, you calculate that the degree of operating leverage is 3.8. The output lowers to 71,000 units. What will the percentage change in operating cash flow be? (Do no...
At an output level of 78,000 units, you calculate that the degree of operating leverage is 3.8. The output rises to 83,000 units. What will the percentage change in operating cash flow be? (Do not...
The following is Camp Hill Corporation's contribution format income statement for last month: Sales: $1,200,000 Variable expenses: $800,000 Contribution margin: $400,000 Fixed expenses: $300,000 Ne...
The use of fixed cost to increase profits at a rate faster than sales increase is called: a. 'What if' analysis b. C-V-P analysis c. operating leverage d. contribution margin approach
Calculate the degree of operating leverage given the following information: sales of $25,000; variable costs of $13,000; and operating income of $7,000 for year one and sales of $40,000; variable c...
When a company's sales revenue is decreasing, high operating leverage is good it means that profits will decrease at a slower pace than revenues decrease. True False
When a company's sales revenue is increasing, high operating leverage is good because it means that profits will increase rapidly. True False
Companies that have higher fixed costs relative to variable costs have higher operating leverage. True False
Operating leverage refers to the extent to which a company's net income reacts to a given change in sales. True False
Company A is a manufacturer with current sales of $4,000,000 and a 60% contribution margin. Its fixed costs equal $1,800,000. Company B is a consulting firm with current service revenues of $3,900,...
The CVP income statements shown below are available for Armstrong Company and Contador Company. Armstrong Co. Sales: $491,000 Variable costs: $243,000 Contribution margin: $248,000 Fixed costs: $15...
The information for Primrose Corporation is given below. Degree of operating leverage: 3 Break-even revenue: $220,000 Variable Expense: 45% of Sales What is the actual net operating income? A. $...
The information for Primrose Corporation is given below. Degree of operating leverage 3 Break-even revenue 220,000 Variable Expense 45% of Sales What is the actual net operating income? A. $ 60,5...
Westminster Co. reports the following data: Sales $875,000 Variable costs 425,000 Contribution margin $450,000 Fixed costs 150,000 Income from operations $300,000 Determine Westminster Co.'s operat...
Westminster Co. reports the following data: Sales 962,500 Variable costs 467,500 Contribution margin 495,000 Fixed costs 165,000 Income from operations 330,000 Determine Westminster Co.'s operatin...
Beemer's sales are $400,000, variable costs are 75% of sales, and operating income is $50,000. What is the operating leverage?
Degree of Operating Leverage Golding Company has decided to offer two types of computers: All-in-One desktops and Laptops. Golding provided the following unit data for each product: All-in-One La...
Bristo Corporation has sales of 2,375 units at $40 per unit. Variable expenses are 20% of the selling price. If total fixed expenses are $66,000, the degree of operating leverage is?
The projected income statement for the coming year is as follows: Sales (60,000 units at $23.00) $1,380,000 Total variable cost 345,000 Contribution margin $1,035,000 Total fixed cost 1,000,500 Op...
How operating leverage affects profitability? Explain the difference between absorption costing and variable costing.
Iverson Corporation's variable expenses are 60% of sales. At a $400,000 sales level, the degree of operating leverage is 5. If sales increase by $40,000, the new degree of operating leverage will be?
The company sold 696,000 units at an average selling price of per solution $4.20 per unit. The variable expenses were $1,900,080, and the fixed expenses were $683,256. Given this information, answe...
1. Explain why airlines are industries that are constantly exposed to the negative effect of having high operating leverage. 2. What would you recommend to minimize the effect of operating leverag...
Define the term operating leverage. What type of effect occurs when the firm uses operating leverage?
The relationship of a company's contribution margin to operating income is measured by a) the operating income ratio b) operating leverage c) margin of operations d) the break-even point.
Chris Gatan, president of Vid Village, has heard about operating leverage and asks you to explain this term. What is operating leverage? How does a company increase its operating leverage?
The degree of operating leverage (DOL) at any given sales volume, X, is useful as: a. An alternative measure of the break-even volume. b. A measure of targeted profit, expressed on a pre-tax basis....
Sales in North Corporation increased from $63,000 per year to $65,520 per year while net operating income increased from $13,000 to $15,600. Given this data, the company's degree of operating lever...
The July contribution format income statement of Doxtater Corporation appears below: Sales $ 564,400 Variable expenses 312,800 Contribution margin 251,600 Fixed expenses 193,800 Net operating inco...
Following is financial information relative to two companies in the same industry. Alpha Omega Sales $10,000,000 $10,000,000 Variable Cost 5,000,000 2,000,000 Contribution Margin 5,000,000 8,000,0...
Engberg Company installs lawn sod in home yards. The company's most recent monthly contribution format income statement follows: Amount Percent of Sales Sales $ 129,000 100% Variable expenses 51,6...
Cleckley Corporation's operating leverage is 5.9. If the company's sales increase by 19%, its net operating income should increase by about: a. 5.9% b. 31.1% c. 19.0% d. 112.1%
Florida Berry Basket harvests early-season strawberries for shipment throughout the eastern United States in March. The strawberry farm is maintained by a permanent staff of 10 employees and season...
What change in operating earnings will a firm that has a DOL = 3 experience if sales decrease from $100,000 to $75,000?
Modern Artifacts can produce keepsakes that will be sold for $80 each. Non-depreciation fixed costs are $1,000 per year and variable costs are $60 per unit. What is the degree of operating leverage...
Contribution Margin= $13404 Operating Income = $6327 If volume goes up by 17.03%, operating income will increase by what percentage?
Financial leverage is distinct from operating leverage since it accounts for: a) use of debt and preferred stock b) variability in fixed operating costs c) variability in sales d) none of the above
Why do labor-intensive processes involve less operating leverage than automated processes? What fixed costs are associated with automation? Why can't those costs be eliminated by just selling the m...
Firms with relatively high non-financial fixed costs are said to have a high degree of what?
Airlines offer an example of an industry in which the degree of operating leverage is fairly high. Why?
Marcus Corporation currently sells 150,000 units a year at a price of $4.00 a unit. Its variable costs are approximately 30 percent of sales, and its fixed costs amount to 50 percent of revenues at...
Operating leverage is a measure of the: a) Sensitivity of net earnings to changes in operating earnings. b) Sensitivity of net earnings to changes in sales. c) Sensitivity of fixed operating costs...
If a firm has a fixed asset base, meaning that its depreciation and amortization for any year is positive, discuss the relation between its Accounting DOL and its Cash Flow DOL.
Discuss the interpretation of the degree of accounting operating leverage and degree of pretax cash flow operating leverage.
Explain how the value of accounting operating leverage can be used.
The law firm of Dewey, Cheatem, and Howe has monthly fixed costs of $100,000, EBIT of $250,000, and depreciation charges on its office furniture and computers of $5,000. Calculate the Cash Flow DOL...
WalkAbout Kangaroo Shoe Stores forecasts that it will sell 9,500 pairs of shoes next year. The firm buys its shoes for $50 per pair from the wholesaler and sells them for $75 per pair. The firm wil...
The degree of pretax cash flow operating leverage at Rackit Corporation is 2.7 when it sells 100,000 units of its new tennis racket and its EBITDA is $95,000. Ignoring the effects of taxes, what ar...
Changes in sales cause changes in profits. Would the profit change associated with sales changes be larger or smaller if a firm increased its operating leverage? Explain your answer.
What is operating leverage, and how does it affect a firm's business risk?
What is the general relationship among operating leverage, financial leverage, and the total leverage of the firm? Do these types of leverage complement one another? Why or why not?
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