Question

Widget Co. has higher operating leverage than Gidget Co. This means that in times of increasing sales for their industry:

Both Widget and Gidget will benefit equally.

Both Widget and Gidget will suffer equally.

Gidget will benefit relatively more than Widget.

Widget will benefit relatively more than Gidget.

Widget Co. has the following variable costs per unit for the widgets that it sells for 10 dollars each: Direct Materials of 2 dollars, Direct Labor of 5 dollars, and Manufaturing Overhead of 1 dollar. It also has fixed monthly costs of 2,000 dollars. If sales increase by 1,000 dollars per month, how much will net income increase?

$200

$800

$400

$600

Answer 1

Answers

• Answer #1

Correct Answer = Option #4 Widget will benefit relatively more than Gidget.
This is because Widget enjoys more operating leverage than Gidget.
Increasing sales will add more to Widget operating income.

• Answer #2

Correct Answer = Option #1: $ 200

A	Sale price per unit		$10
	Direct material	$2
	Direct Labor	$5
	Variable overhead	$1
B	Total variable cost per unit		$8
C = A - B	Contribution margin per unit		$2
D = (C/A) x 100	CM Ratio		20%
E = $ 1000 x D	Increase in Net Income due to $ 1000 increase in Sales		$200 = Answer