Question

Varner Inc. and King Inc. have the following operating data:

	Varner Inc.		King Inc.
Sales	$379,400		$1,235,000
Variable costs	152,200		741,000
Contribution margin	$227,200		$494,000
Fixed costs	156,200		304,000
Income from operations	$71,000		$190,000

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

Varner Inc.
King Inc.

b. How much would income from operations increase for each company if the sales of each increased by 15%? If required, round answers to nearest whole number.

	Dollars	Percentage
Varner Inc.	$		%
King Inc.	$		%

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

Answer 1

Answer

a. operating leverage = cm/net operating income

Varner Inc = 227200/71000 = 3.2 Times

King Inc = 494000/190000 = 2.6 Times

answer: Varner 3.2 , King 2.6

b.

varner: $71,000*.15*3.2 = $34080

15% * 3.2 = 48%

king: 190,000*.15*2.6 = $74100

15% * 2.6 = 39%

answer:

varner: $34080, 48%

king: $74,100, 39%

c

Varner Inc has higher operating leverage than King Inc. Therefore, its fixed costs are a larger percentage of contribution margin and increases in sales increase operating profit faster than King Inc.