Question

Question 7 Pure Water Products produces two types of water filters. One attaches to the faucet and cleans all water that passes through the faucet. The other is a pitcher-filter that only purifies water meant for drinking Revenue and cost information for each product appears below: • the unit that attaches to the faucet is sold for $70 and has variable costs of $30 the pitcher-filter sells for $80 and has variable costs of $45 fixed costs total $424,000 Pure Water sells 4 faucet models for every 3 pitcher-filters sold Assume that last year, the company sold 11,400 faucet-models. Calculate the degree of operating leverage reported by Pure Water Products last year. Enter your answer with two places after the decimal point 2.28

I'm unsure with my answer.

Answer 1

The answer is correct.

Explanation -

It is mentioned in the question that for 4 faucet models, 3 pitcher filters are sold.

So number of pitcher filters sold = 11400/4 ×3 = 8550 units

Total sales = Sale of Faucet Model +Sale of Pitcher Filters

=11400×70 + 8550×80

=$798000 + $684000 =$1482000

Total Variable Cost = Variable Cost of Faucet Model + Variable Cost of Pitcher Filters

=11400×30 + 8550×45

= $342000 + 384750

= $726750

Fixed Cost =$424000

Contribtion= Sales - Variable Cost

=$1482000 - $726750

=$755250

Earning Before Interest and Tax(EBIT) =Contribution - Fixed Cost

= $755250 - $424000

= $331250

Operating Leverage = Contribution /EBIT

= 755250/331250

= 2.28

So, Operating Leverage = 2.28