Selling price per unit Rs 120; Variable cost per unit Rs 70; Fixed Cost = Rs 2,00,000; What is Operating leverage when firm sells and produces 6000 units
Answers
The question does not provide information about the operating income. Therefore, we cannot calculate the exact value of the operating leverage without knowing the operating income.
Operating leverage is a measure of the extent to which a company's operating income (profit) changes in response to a change in its sales. It quantifies the relationship between fixed costs and variable costs. It can be calculated using the formula:
Operating Leverage = Contribution Margin / Operating Income
Contribution Margin is calculated as the difference between the selling price per unit and the variable cost per unit. In this case, the selling price per unit is Rs 120, and the variable cost per unit is Rs 70. Therefore, the contribution margin per unit is Rs 120 - Rs 70 = Rs 50.
To determine the operating income, we need to calculate the total contribution margin, which is the contribution margin per unit multiplied by the number of units sold and produced. Given that the firm sells and produces 6000 units, the total contribution margin is Rs 50 x 6000 = Rs 3,00,000.
Now, we can calculate the operating leverage:
Operating Leverage = Contribution Margin / Operating Income
Operating Leverage = Rs 3,00,000 / Operating Income
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