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Calculate operating leverage for each of the four firms A, B, C and D from the following price and cost data
Calculate operating leverage for each of the four firms A, B, C and D from the following price and cost data. What conclusions do you draw with respect to levels of fixed cost and degree of operating leverage? Assume number of units sold is 5000. A B c D Sale price per unit 20 32 50 70 Variable cost per unit 6 16 20 50 Fixed operating cost 80000 40000 200000 Nil
Expert Solution
Operating leverage = Fixed cost /total cost
Total cost = Fixed cost + variable cost
A
Fixed cost = 80000
Variable cost = 6*5000
30000
Total cost = 80000+30000
210000
Operating leverage = 80000/210000
38%
B
Fixed cost = 40000
Variable cost = 5000*16
80000
Total cost = 40000+80000
120000
Operating leverage = 40000/120000
33%
c
Fixed cost = 200000
Variable cost = 5000*20
100000
Total cost = 200000+100000
= 300000
Operating leverage =200000/300000
67%
D
can't be determined
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