Modern Artifacts can produce keepsakes that will be sold for $50 each. Nondeprec

Question

Modern Artifacts can produce keepsakes that will be sold for $50 each. Nondepreciation fixed costs are $700 per year, and variable costs are $40 per unit. The initial investment of $2,100 will be depreciated straight-line over its useful life of 3 years to a final value of zero, and the discount rate is 16%. a. What is the degree of operating leverage of Modern Artifacts when sales are $7,750? (Do not round intermediate calculations. Round your answer to 2 decimal places.) b. What is the degree of operating leverage when sales are $13,500? (Do not round intermediate calculations. Round your answer to 2 decimal places.) c. Why is operating leverage different at these two levels of sales?

Explanation / Answer

Operating levarage = Contribution margin/ Net operating income (a) (b) (a) & (b) Sales (amount) 7750 13500 Sales Unit (amount/Selling price) 155 270 Variable cost (Units X VC p.u.) 6200 10800 Contribution (sales- vc) 1550 2700 Less: Fixed cost 1400 1400 Net operating 150 1300 OL = Cont./NOI 10.33333 2.076923 Fixed cost = Annual FC + Depreciation Annual fc = 700 Depreciation (2100/3) 700 1400 (c ) Difference is due to change in sales - Degree Operating levarage means Change in contribution due to change in sales. Therefore the difference is due to different level of sales. Please provide feedback… Thanks in Advance :-)

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