Modern Artifacts can produce keepsakes that will be sold for $40 each. Nondeprec

Question

Modern Artifacts can produce keepsakes that will be sold for $40 each. Nondepreciation fixed costs are $600 per year, and variable costs are $20 per unit. The initial investment of $1,800 will be depreciated straight-line over its useful life of 9 years to a final value of zero, and the discount rate is 13%.

a. What is the degree of operating leverage of Modern Artifacts when sales are $1,800? (Do not round intermediate calculations. Round your answer to 2 decimal places.) Degree of operating leverage

b. What is the degree of operating leverage when sales are $2,880? (Do not round intermediate calculations. Round your answer to 2 decimal places.) Degree of operating leverage

c. Why is operating leverage different at these two levels of sales?

Degree of operating leverage (increasing/decreaseing) is when profits are (increasing/decreasing).

Explanation / Answer

Answer a Degree of operating leverage = Contribution margin percentage / operating margin percentage Contribution margin = Sales - variable cost = $40 - $20 = $20 Contribution margin percentage = Contribution / sales = $20/$40 = 50% Operating margin = (Sales * Contribution margin %) - Fixed cost - depreciation = Depreciation = $1800/9 years = $200 per year Operating margin = (1800 * 50 %) - 600 - 200 = $100 Operating Margin percentage = Operating margin / sales = $100/$1800 = 5.56% Degree of operating leverage = 50% / 5.56% = 8.99 Answer b Operating margin = (Sales * Contribution margin %) - Fixed cost - depreciation = Operating margin = (2880 * 50 %) - 600 - 200 = $640 Operating Margin percentage = Operating margin / sales = $640/$2880 = 22.22% Degree of operating leverage = 50% / 22.22% = 2.25 Answer c Operating leverage different at these two level of sales because, Degree of operating leverage increasing when profits are decreasing.

Related Questions

Navigate

• Browse (All)
• Browse M
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.