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 | % |
Homework Answers
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% |
Comment if you face any issues
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