Question

Company A is a manufacturer with sales of $4,000,000 and a 60% contribution margin. Its fixed costs equal $1,800,000. Company B is a consulting firm with service revenues of $3,900,000 and a 25% contribution margin. Its fixed costs equal $400,000. Compute the degree of operating leverage (DOL) for each company. Which company benefits more from a 20% increase in sales Complete this question by entering your answers in the tabs below. Company Benefits DOL Compute the degree of operating leverage (DOL) for each company Contribution Margin Income Statement Company A Company B Sales Variable costs Contribution margin Fixed costs Degree of Operating Leverage Choose: Numerator Denominator Ratio Degree of Operating Leverage = Company A 0 Company B 0

Answer 1

Answer :- contribution morgin mome statement company A company B $3,900,000 Sales $4,000000 (1860,000)* (3925,000) variable cost $ 975,000 Contribution margin $2,400,000 Fixed cost $100,000) $400,000) $ S5000 $ 609000 Prelax Income * 4,000,000 X (100 – 60%) = $1600000 ** 3,900,000 (100% - 25%) = $2925000 24 Degree of Operating Leverage Ratio Degree of operating Numerator / Denommator contribution margin / Pretax income leverage - 4. company # company B : $2,400,000 600,000 $975,000 $575.000 1.69 3 Company A - Because we expect a 20% increcye. Pn sales to yield a 2011. Increase in income (4x2011.). for company B we expect a 2041 increase in sales to yield a 33.864. increase in income (1969X2000). Note that although Company A's fixed cost are higher, its increase in income is greater than that for company is due to higher Operating Letronage. is company 'H' benefits more.