15SE - Horngren'S Financial And Managerial Accounting

Question

Use the following information to complete Short Exercises S20-10 through S20-15. 

Funday Park competes with Cool World by providing a variety of rides. Funday Park sells tickets at \(70 per person as a one-day entrance fee. Variable costs are \)42 per person, and fixed costs are $170,800 per month. 

 

S20-15 Computing degree of operating leverage 

Refer to the original information (ignoring the changes considered in Short Exercises S20-12 and S20-13). If Funday Park expects to sell 8,100 tickets, compute the degree of operating leverage (round to two decimal places). Estimate the operating income if sales increase by 15%.

Step-by-Step Solution

Answer

The degree of operating leverage is 4.05.

Calculation of Contribution margin

$\begin{array}{c}\mathrm{Contribution} \mathrm{margin}=\mathrm{Sales} \mathrm{price}–\mathrm{Variable} \mathrm{cost}\\ =\$70-\$42\\ =\$28\end{array}$

Calculation of degree of Operating leverage

$\begin{array}{c}\mathbf{Degree}\mathbf{ }\mathbf{of}\mathbf{ }\mathbf{operating}\mathbf{ }\mathbf{leverage}\mathbf{=}\frac{\mathrm{Contribution} \mathrm{margin}}{\mathrm{Operating} \mathrm{income}}\\ \mathbf{=}\frac{\$28\times 8,100}{\left(\$28\times 8,100\right)\mathbf{-}\mathbf{\$}\mathbf{170}\mathbf{,}\mathbf{800}}\\ \mathbf{=}\frac{\$226,800}{\$56,000}\\ \mathbf{=}\mathbf{4}\mathbf{.}\mathbf{05}\end{array}$