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Financial & Managerial Accounting
Found in: Page 834
Financial & Managerial Accounting

Financial & Managerial Accounting

Book edition 7th
Author(s) John J Wild, Ken W. Shaw, Barbara Chiappetta
Pages 1096 pages
ISBN 9781259726705

Short Answer

Singh Co. reports a contribution margin of $960,000 and fixed costs of $720,000. (1) Compute the company’s degree of operating leverage. (2) If sales increase by 15%, what amount of income will Singh Co. report?

Degree of operating leverage: 4.0

Income before tax: $384,000

See the step by step solution

Step by Step Solution

Step 1: Definition of Operating Leverage

The calculation that reflects the degree to which the profit of the business entity can be increased by increasing the revenue of the business entity is known as operating leverage.

Step 2: Calculation of operating leverage

Step 3: Income reported after an increase in sales

Particular

Amount $

New contribution margin @115% of $960,000

$1,104,000

Less: Fixed cost

(720,000)

Income before tax

$384,000

Note: An increase in sales will increase the contribution margin by 15%.

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