Question

Beck Inc. and Bryant Inc. have the following operating data: Beck Inc Bryant Inc. Sales Variable costs Contribution margin Fixed costs Income from operations $1,250,000 $2,000,000 750,000 1,250,000 $750,000 450,000 $500,000 400,000 $100,000 a. Compute the operating leverage for Beck Inc. and Brvant Inc. If required, round to one decimal place Beck Inc. Bryant Inc. b. How much would income from 2.5 V operations increase for each company if the sales of each increased by 20%, tf required, round a Dollars answers to nearest whole number Percentage Beck Inc. Bryant Inc. c. The difference in the increases of income from operations is due to the difference in the operating leverages. Beck tnc.'s higher that its fixed costs are a larger percentage of contribution margin than are Bryant Inc.'s. operating leverage means Previous Next Check My Work

Answer 1

To calculate how much income will change with change in Sales we need to calculate operating leverage,.

	Beck Inc	Bryant Inc
Sales	$    12,50,000.00	$                           20,00,000.00
Variable cost	$       7,50,000.00	$                           12,50,000.00
Contribution margin	$       5,00,000.00	$                             7,50,000.00
Fixed Costs	$       4,00,000.00	$                             4,50,000.00
Net Income	$       1,00,000.00	$                             3,00,000.00
Degree of Operating Leverage	5.00	2.50

So Degree of operating leverage = % change in EBIT / % changes in sales

If Degree of operating leverage is 5 and change in sales is 20% then change in net income will be (20% x 5)= 100% in case of Beck inc and (2.5 x 20%) = 50% in case of Bryant inc.

	Dollars	Percentage
Beck Inc	$      2,00,000.00	100%
Bryant inc	$      4,50,000.00	50%

.