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

Pure Water Products Contribution margin last year: Faucet ($40 x 11,400) Pitcher ($35 x 8,550) Less: Fixed costs Net income last year 456000 299250 755250 424000 331250 Faucet = 11400 Pitcher Fillers = 11400 x 3/4 = 8550 Degree of Operating Leverage = Contribution margin - Net income = 755250 / 331250 = 2.28