What is Harley's operating leverage? 3.1, 1.3 or 1.2 **Understanding Operating Leverage: An Example with Harley Company****Scenario:**Harley Company has sales of $500,000, variable costs are 75% of sales, and income from operations is $40,000. What is Harley's operating leverage?---**Explanation:**Operating leverage measures how revenue growth translates into growth in operating income. It is crucial for understanding the impact of fixed and variable costs on the profitability of a company. **Calculation Steps:**1. **Determine Contribution Margin:** Contribution Margin = Sales - Variable Costs Variable Costs = 75% of Sales = 0.75 * $500,000 = $375,000 Contribution Margin = $500,000 - $375,000 = $125,0002. **Calculate Operating Leverage:** Operating Leverage = Contribution Margin / Income from Operations Operating Leverage = $125,000 / $40,000 = 3.125---**Result:**Harley Company’s operating leverage is 3.125. This indicates that for every 1% change in sales, the operating income will change by approximately 3.125%. Operating leverage is higher when a company has a greater proportion of fixed costs compared to variable costs.

Operating leverage is a method of measuring the degree to which a firm can increase its operating income. It can be calculated by dividing the contribution margin by operating income.Operating leverage = Contribution / Operating profit Contribution = Sales * ( 1 – Variable cost ) = 500,000 ( 1 – 0.75 ) = 125,000 Operating leverage = 125,000 / 40,000 = 3.125 So the correct answer is 3.1