Suppose a company sells 100,000 units of a product with fixed costs of $ 700,000 and variable cost of $ 1.80 per unit. The sale price per unit is $ 8.00. Calculate the Operating gearing?
Question
Suppose a company sells 100,000 units of a product with fixed costs of 1.80 per unit. The sale price per unit is $ 8.00. Calculate the Operating gearing?
Solution
To calculate the operating gearing, we first need to calculate the contribution margin and the fixed costs.
Step 1: Calculate the Contribution Margin per unit The contribution margin per unit is calculated by subtracting the variable cost per unit from the selling price per unit.
Contribution Margin per unit = Selling price per unit - Variable cost per unit = 1.80 = $6.20 per unit
Step 2: Calculate the Total Contribution Margin The total contribution margin is calculated by multiplying the contribution margin per unit by the total number of units sold.
Total Contribution Margin = Contribution Margin per unit * Total units sold = 620,000
Step 3: Calculate the Operating Gearing The operating gearing is calculated by dividing the fixed costs by the total contribution margin.
Operating Gearing = Fixed Costs / Total Contribution Margin = 620,000 = 1.13
So, the operating gearing of the company is 1.13. This means that for every dollar of sales, the company has $1.13 of fixed costs.
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