Question

Beck Ltd and Bryant Ltd have the following operating data:

	Beck Ltd ($)	Bryant Ltd ($)
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

Required:

1. What is the operating leverage for Beck Ltd and Bryant Ltd?
2. If the sales of each company increased by 20%, how much would income from operations increase for each company?
3. Why is there a difference in the increase in income from operations for the two companies? Explain.

Answer 1

a)	Degree of operating leverage
	contribution margin/net income
				Beck	Bryant
	Degree of operating leverage			5	2.5
b)	increase in net income = % increase in sales * degree of operating leverage
				Beck	Bryant
	% increase in net income			100	50
	so increase in amount			100,000	150,000	answer
c)	The Difference is because of of the difference in degree of operating
	leverage.We see that the Becks operating leverage is more than that
	of bryant this is because of the higher percentage of fixed cost of contribution
	margin .Hence the Becks increase in sales increases operating profit at a
	faster rate