Problem

Operating Leverage These sales and cost data (000s) are for two companies in the transport...

Operating Leverage These sales and cost data (000s) are for two companies in the transportation industry:

 

Company A

Company B

 

Amount

Percent of sales

Amount

Percent of sales

Sales

$100,000

100%

$100,000

100%

Variable costs

60,000

60

30,000

30

Contribution margin

$ 40,000

40%

$ 70,000

70%

Fixed costs

15,000

 

40,000

 

Operating profit

$ 25,000

 

$ 30,000

 

Required

1. Calculate the operating leverage for each company. If sales increase, which company benefits more? How do you know?


2. Assume that sales rise 10 percent in the next year. Calculate the percentage increase in profit for each company. Are the results what you expected?

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