Question

Operating Leverage SunRise Inc. and SunSet Inc. have the following operating data: SunRise Inc. SunSet Inc. Sales $220,400 $588,000 Variable costs (88,400) (352,800) Contribution margin $132,000 $235,200 Fixed costs (77,000) (88,200) Operating income $55,000 $147,000 a. Compute the operating leverage for SunRise Inc. and SunSet Inc. Round the answers to one decimal place. SunRise Inc. SunSet Inc.

Answer 1

Part-a
	Sunrise Inc.	Sunset Inc.
Contribution Margin (a)	$132,000.00	$235,200.00
Operating Income (b)	$55,000.00	$147,000.00
Operating Leverage (a/b)	2.4	1.6
Part-b
	Sunrise Inc.	Sunset Inc.
Operating Leverage (a)	2.4	1.6
% of Sales Increase   (b)	20%	20%
Income Increase by (aXb)	48%	32%
Inccome increase in dollar	$26,400.00	$47,040.00
	(55000*48%)	(147000*32%)

Part-c
Sunrise Inc. Higher opeating leverage menas that its Fixed Cost are a larger percentage of Sales than are sunset Inc. Thus increase in sales increase operating profit at a 48% rate for sunrise inc. than for sunset Inc.