Question

Operating Leverage

Beck Inc. and Bryant Inc. have the following operating data:

	Beck Inc.		Bryant Inc.
Sales	$1,250,000		$2,000,000
Variable costs	750,000		1,250,000
Contribution margin	$500,000		$750,000
Fixed costs	400,000		450,000
Income from operations	$100,000		$300,000

a. Compute the operating leverage for Beck Inc. and Bryant Inc. If required, round to one decimal place.

Beck Inc.
Bryant Inc.

b. How much would income from operations increase for each company if the sales of each increased by 20%? If required, round answers to nearest whole number.

	Dollars	Percentage
Beck Inc.	$	%
Bryant Inc.	$	%

c. The difference in the of income from operations is due to the difference in the operating leverages. Beck Inc.'s operating leverage means that its fixed costs are a percentage of contribution margin than are Bryant Inc.'s.

Answer 1

1)operating leverage = contribution/net income Beck inc 5 Byrant 2.5 2)income from operations increase = increase in sales *degree of operating leverage dollar increase = net income *pecentage dollars percentage Beck 100,000 100 Byrant 150,000 50 the difference in the increase of income from operations is due to the difference in operating leverages.Beck's higher operating leverage means that its fixed cost are a larger percentage of contribution margin than are Bryant's inc .thus increase in sales increase operating profit at a faster rate for Beck inc than for Bryant inc.