Question

Ocean Cruiseline offers nightly dinner cruises departing from several cities on the East Coast of the United States including​ Charleston, Baltimore, and Alexandria. Dinner cruise tickets sell for

$50

per passenger.

Ocean

​Cruiseline's variable cost of providing the dinner is

$20

per​ passenger, and the fixed cost of operating the vessels​ (depreciation, salaries, docking​ fees, and other​ expenses) is

$210,000

per month. The​ company's relevant range extends to

18,000

monthly passengers. The breakeven sales are

7,000

tickets sold.a. Compute the operating leverage factor when

Ocean

Cruiseline sells

8,750

dinner cruises.   b. If volume increases by

10​%,

by what percentage will operating income​ increase? c. If volume decreases by

6​%,

by what percentage will operating income​ decrease?

a. Compute the operating leverage factor when

Ocean

Cruiseline sells

8,750

dinner cruises. ​(Round your answer to one decimal​ place.)

​First, identify the​ formula, then compute the operating leverage factor.

÷

=

Operating leverage factor

÷

=

b. If volume increases by

10​%,

by what percentage will operating income​ increase? ​(Round the percentage to the nearest whole​ percent.)

The percentage that operating income will increase is

%.

c. If volume decreases by

6​%,

by what percentage will operating income​ decrease? ​(Round the percentage to the nearest whole​ percent.)

The percentage that operating income will decrease is

%.

Answer 1

Working Notes for Solving the Question:-

Contribution Margin per Dinner Cruise Sale = Sales Price per Dinner Cruise - Variable Costs per Dinner Cruise

Sales Price per Dinner Cruise = $ 50

Variable Costs per Dinner Cruise = $ 20

Contribution Margin = 50 - 20

Contribution Margin per Dinner Cruise Meal Sale = $ 30

Contribution Margin in Sale of 8,750 Meals = 8,750 * Contribution Margin per Meal Sale

= 8,750 * 30

= $ 262,500

Operating Income on Sale of 8,750 Dinner Meals = Contribution Margin on Sale of 8,750 Meals - Fixed Costs

Fixed Costs = $ 210,000

Operating Income = 262,500 - 210,000

Operating Income = $ 52,500

Question 1

Operating Leverage Factor = Contribution Margin / Operating Income

Contribution Margin = $ 262,500

Operating Income = $ 52,500

Operating Leverage Factor = 262,500 / 52,500

Operating Leverage Factor = 5 Times

Question 2

Operating Level Factor = % Change in Operating Income / % Change in Sales

If Sales Increase by 10%

5 = % Change in Operating Income / 10%

5 * 10% = % Change in Operating Income

% Change in Operating Income = 50%

If Sales Increase by 10% then Operating Income will increase by 50%.

Question 3

Operating Level Factor = % Change in Operating Income / % Change in Sales

If Sales Decrease by 6%

5 = % Change in Operating Income / 6%

5 * 6% = % Change in Operating Income

% Change in Operating Income = 30%

If Sales Decrease by 6% then Operating Income will Decrease by 30%.

Note

There are various alternatives Formula for Calculation of Operating Leverage Factor out of which two has been used in above questions.