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 $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.

Answer 1

Degree of operating leverage = Contribution Margin/Net Operating Income
	Faucet	Pitcher filter	Total
Sales	798,000	684,000	1,482,000
Variable Expenses	342,000	384,750	726,750
contribution margin	456,000	299,250	755,250
Fixed expenses			424,000
Net operating income			331,250
Degree of operating leverage	2.28	times

B 1 Degree of operating leverage = Contribution Margin/Net Operating Income 3 Sales 4 Varaible Expenses 5 contribution margin 6 Fixed expenses 7 Net operating income Faucet Pitcher filter Total =11400*70 =11400*80*3/4 =B3+C3 =11400*30 =11400*45*3/4 =B4+C4 =B3-B4 =C3-C4 =D3-D4 424000 =D5-D6 9 Degree of operating leverage =D5/D7 times