Question

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 $45 the pitcher-filter sells for $80 and has variable costs of $30 fixed costs total $442,000 Pure Water sells 4 faucet models for every 3 pitcher-filters sold Assume that last year, the company sold 11,934 pitcher-filters Calculate the degree of operating leverage reported by Pure Water Products last year. Enter your answer with two places after the decimal point.

Answer 1

No. of Pitcher filters sold = 11,934 filters

No. of faucet models sold = (No. of Pitcher filters sold/3)*4

= (11,934 Pitcher/3)*4 = 15,912 faucets

Contribution per unit of Faucet = Sale Price - Variable Cost per unit

= $70 - $45 = $25 per unit

Contribution per unit of Pitcher = $80 - $30 = $50 per unit

Total Contribution = (Faucet Filters sold*Contribution per unit)+(Pitcher filters sold*Contribution per unit)

= (11,934 filters*$25 per unit)+(15,912 filters*$50 per unit)

= $298,350+$795,600 = $1,093,950

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

= $1,093,950 - $442,000 = $651,950

Degree of Operating Leverage = Contribution/EBIT

= $1,093,950/$651,950 = 1.68

Therefore the degree of operating leverage reported by Pure Water Products last year was 1.68.