Question

Operating Leverage Income statements for two different companies in the same industry are as follows: Trimax, Inc....

Operating Leverage

Income statements for two different companies in the same industry are as follows:

Trimax, Inc. Quintex, Inc.
Sales $500,000     $625,000    
Less: Variable costs 250,000     125,000    
   Contribution margin $250,000     $500,000    
Less: Fixed costs 200,000     450,000    
   Operating income $50,000     $50,000    

Required:

1. Compute the degree of operating leverage for each company.

Trimax
Quintex

2. Compute the break-even point in dollars for each company.

Trimax, Inc. $
Quintex, Inc. $

Why is the break-even point for Quintex, Inc., higher?

3. Suppose that both companies experience a 40 percent increase in revenues. Compute the percentage change in profits for each company.

Trimax %
Quintex %
0 0
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Answer #1

Degree of operating leverage = Contribution margin/Operating income

Trimax (250,000/50,000) 5
Quintex (500,000/50,000) 10

Breakeven dollars = Fixed cost/CM ratio

Trimax (200,000/50%) 400,000
Quintex (450,000/80%) 360,000

Percentage change = Operating leverage * increase in revenue

Trimax (5*40) 200%
Quintex (10*40) 400%

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