Computing Operating Leverage

Suppose the Coffee Bean has a new shop in a Cambridge village shopping center that sells high$-$end teas and coffees. Further, suppose it has added smoothie drinks to its product line. Below are the assumed sales and cost data for the company.

CoffeeTeaSmoothieSales price per $(12$ oz$.)$ serving$$1\mathrm{.}35$$$1\mathrm{.}25$$$1\mathrm{.}95$Variable cost per serving$0\mathrm{.}600\mathrm{.}450\mathrm{.}75$Fixed costs per month$$8,000$

Assume that the company sells each month an average of $6,000$ servings of coffee, $3,750$ servings of tea, and $2,250$ servings of smoothies.

REQUIRED

a$.$ Calculate Coffee Bean's operating leverage ratio

NumeratorDenominatorResultAnswer $1$Contribution marginFixed costsGross marginPre$-$tax profitSalesVariable costs$$Answer $2$Contribution marginFixed costsGross marginPre$-$tax profitSalesVariable costs$=$Operating leverage ratioAnswer $3$Answer $4=$

b$.$ If sales increase by $20\%,$ by how much will before$-$tax profit be expected to change?

$Answer $5$

c$.$ If sales decrease by $20\%,$ by how much will before$-$tax profit be expected to change?

$Answer $6$

Note: Use a negative sign with your answer to indicate a decrease in profits.