Question

You have the following information for Al Corp. and BK Corp. regarding their most recent financial...

You have the following information for Al Corp. and BK Corp. regarding their most recent financial performance:

AI Corp.

BK Corp.

Sales

$   150,000

$ 150,000

Variable expenses

        55,000

105,000

   

   

Fixed expenses

        60,000

10,000

Based on operating leverage, which company is more risky?

BK with a DOL of 1.29.

AI with a DOL of 2.71.

AI with a DOL of 1.58.

BK with a DOL of 4.50.

Homework Answers

Answer #1
Ans. Option 2nd Al with a DOL of 2.71
*Working notes :
Al Corp. Bk Corp.
Sales $150,000 $150,000
Less: Variable expenses -$55,000 -$105,000
Contribution margin $95,000 $45,000
Less: Fixed expenses -$60,000 -$10,000
Net income $35,000 $35,000
Degree of operating leverage (DOL) = Contribution margin / Net income
Al Corp. $95,000 / $35,000 2.71
Bk Corp. $45,000 / $35,000 1.29
*Al corp. has higher fixed expenses which results in a higher operating leverage ratio.
The higher operating leverage ratio is an indication of higher risk.
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