Question

Operating Leverage

Income statements for two different companies in the same industry are as follows:

		Trimax, Inc.		Quintex, Inc.
Sales		$300,000		$337,500
Less: Variable costs		150,000		67,500
Contribution margin		$150,000		$270,000
Less: Fixed costs		120,000		240,000
Operating income		$30,000		$30,000

Required:

1. Compute the degree of operating leverage for each company.

Trimax
Quintex

2. Compute the break-even point in dollars for each company.

Trimax, Inc.	$
Quintex, Inc.	$

Why is the break-even point for Quintex, Inc., higher?

3. Suppose that both companies experience a 40 percent increase in revenues. Compute the percentage change in profits for each company.

Trimax		%
Quintex		%

Answer 1

S.NO	Particulars	Trimax	Quintex
1	Sales	3,00,000	3,37,500
2	Variable cost	-1,50,000	-67,500
3	Contribution	1,50,000	2,70,000
4	PV Ratio(1/2)	0.50	0.80
5	Fixed Costs	1,20,000	2,40,000
6	Opearing Profit	30,000	30,000
1)Ans:	Operating Leverage	Contribution/EBIT
		5	9
2)Ans:	Break Even Point	Fixed Cost/PV Ratio
		2,40,000	3,00,000
3)Ans:
1	New Sales	4,20,000	4,72,500
2	New Contribution	2,10,000	3,78,000
3	Fixed Cost	1,20,000	2,40,000
4	New Profit	90,000	1,38,000
5	Old Profit	30,000	30,000
6	Change in Profit	60,000	1,08,000
7	% Change(6/5)	200%	360%