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

It is given that Pure water sells 4 faucet models for every 3 pitcher-filters and in last year it sold 11,934 pitcher-filters, then sales units of the faucet models will be 15,912 units [ i.e. 11,934 * 4/3 ]

Sales [ ( 15,912 * $70 ) + ( 11,934 * $80 ) ]	$2,068,560
(-) Variable cost [ ( 15,912 * $45 ) + ( 11,934 * $30 ) ]	( $1,074,060 )
Contribution	$994,500
(-) Fixed cost	( $442,000 )
Operating profit	$552,500

Degree of operating leverage = Contribution / Operating profit = $994,500 / $552,500 = 1.80