Question

Bluebird Inc. sells flats of eggs. It has a contribution margin of $150,000 and operating income...

Bluebird Inc. sells flats of eggs. It has a contribution margin of $150,000 and operating income of $60,000.

(a) Calculate Bluebird's degree of operating leverage?

(b) Calculate degree of operating leverage if contribution margin decreased to $120,000 and net income remained constant at $60,000?

(c) In which case (a or b) is the company more sensitive to changes in sales? Answer(a) CM of $150,000(b) CM of $120,000

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Answer #1

(a) Degree of operating leverage = Contribution margin/Operating income = $150000/$60000 = 2.5.

(b) Degree of operating leverage = Contribution margin/Operating income = $120000/$60000 = 2

(c) Answer: (a) CM of $150,000.

Higher the operating leverage, greater is the change in the operating income with every change in the sales. Hence, the company is more sensitive to changes in sales in case (a) where the operating leverage is 2.5 as compared to case (b) where the operating leverage is lower at 2.

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