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A company reports a contribution margin of $100,000 and operating income of $20,000. What is its operating leverage?
A2 times
B5 times
C4 times
D8 times
Answer & Solution
Correct answer: B. 5 times
1. Operating leverage divides contribution margin by operating income.
2. $100,000 divided by $20,000 gives 5.
3. The gap between the two figures is fixed costs, here $80,000.
4. A company with the same margin but only $50,000 of fixed costs would show leverage of 2.
_Source: Jonick, Principles of Managerial Accounting (UNG Press, CC BY-SA 4.0), section 5.4 Operating Leverage_
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