Calculating Acme Company's Fixed Costs

Understanding Acme Company's Financial Data

Acme Company's monthly operating income is $48,000. The company's variable costs account for 40% of its sales revenue, and the degree of operating leverage is 2.75.

Question:

What are Acme's fixed costs?

Final answer:

To find Acme Company's fixed costs, we can use the formula for the degree of operating leverage (DOL): DOL = Contribution Margin / Operating Income. Given that DOL = 2.75 and the variable costs are 40% of sales revenue, we can calculate the fixed costs using the provided data. Acme Company's fixed costs are $132,000.

Explanation:

To determine Acme Company's fixed costs, we start by calculating the contribution margin. Using DOL = 2.75 and knowing that variable costs are 40% of sales revenue, we have the formula DOL = (Sales - Variable Costs) / Operating Income. By rearranging the equation, we get Sales - Variable Costs = DOL * Operating Income.

Substituting the known values, we find Sales - 0.4 * Sales = 2.75 * $48,000. Simplifying further, we get 0.6 * Sales = $132,000. Solving for Sales gives us Sales = $220,000. Subtracting the variable costs from this, we arrive at the fixed costs: Fixed Costs = Sales - Variable Costs = $220,000 - 0.4 * $220,000 = $132,000.

Therefore, Acme Company's fixed costs amount to $132,000. The correct answer is D) $23,272.73.