a. Operating leverage = Contribution margin / Income from operations
Beck Inc. [ $500,000 / $100,000 ] |
5 |
Bryant Inc. [ $750,000 / $300,000 ] |
2.5 |
b. % change in income from operations / % change in sales = Operating leverage
In case of both the companies sales is increased by 20%
Beck Inc. :
% change in income from operation / 20% = 5
% change in income from operations = 5 * 20% = 100%
Thus here if the sales is increased by 20%, the income from operations will increase by 100%
Increase in income from operations = Current income from operations * % increase in income from operations = $100,000 * 100% = $100,000
Bryant Inc. :
% change in income from operations / 20% = 2.5
% change in income from operations = 2.5 * 20% = 50%
Thus here if the sales is increased by 20%, the income from operations will increase by 50%
Increase in income from operations = Current income from operations * % increase in income from operations = $300,000 * 50% = $150,000
Dollars | Percentage | |
Beck Inc. | $100,000 | 100% |
Bryant Inc. | $150,000 | 50% |
c. The difference in the increases in income from operations is due to the difference in the operating leverages. Beck Inc's higher operating leverage means that its fixed costs are a larger percentage of contribution margin than are Bryant Inc.'s
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