Question

Operating Leverage

Beck Inc. and Bryant Inc. have the following operating data:

	Beck Inc.		Bryant Inc.
Sales	$336,700		$975,000
Variable costs	135,100		585,000
Contribution margin	$201,600		$390,000
Fixed costs	145,600		240,000
Income from operations	$56,000		$150,000

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

Beck Inc.
Bryant Inc.

b. How much would income from operations increase for each company if the sales of each increased by 10%? If required, round answers to nearest whole number.

	Dollars	Percentage
Beck Inc.	$		%
Bryant Inc.	$		%

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

Answer 1

a

Operating leverage = Contribution margin / Income from operations

Beck Inc.

3.6

=201600/56000

Bryant Inc.

2.6

=390000/150000

b

Beck Inc.

Dollars

20160

=56000*36%

Percentage

36%

=10%*3.6

Bryant Inc.

Dollars

39000

=150000*26%

Percentage

26%

=10%*2.6

c

The difference in the increases of income from operations is due to the difference in the operating leverages. Beck Inc.'s higher operating leverage means that its fixed costs are a larger percentage of contribution margin than are Bryant Inc.'s