You are provided with production activity information for Fancy Furniture, Inc.

Question

You are provided with production activity information for Fancy Furniture, Inc. Calculate the company’s degree of operating leverage. Round to 2 decimal places.

Fancy Furniture Inc., October Production Activity
Direct Materials 130.00 per unit
Direct Labor 30.00 per unit
Variable Overhead 20.00 per unit
Variable Selling 20.00 per unit
Fixed Overhead 67,000 per month
Fixed General and administrative 50,000 per month
Units Produced 250 per month
Units in beginning finished goods -   0

Units Sold 510
Selling Price 500 per unit

Explanation / Answer

Variable Cost per Unit Direct Material $130 Direct Labor 30 Variable overhead 20 Variable selling overhead 20 Total variable cost $200 Selling price per unit $500 Contribution per unit $300 ($500-$200) Sales (510 *$500) $255,000 Variable expenses(510*$200) 102,000 Contribution margin 153,000 Less:Fixed Expenses 117,000 (67,000+50,000) Net operating income 36,000 Degree of Operating Leverage= Contribution margin/Net operating income 153,000/36,000 4.25

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