Question

Operating Leverage
Beck Inc. and Bryant Inc. have the following operating data:
 Beck Inc.Bryant Inc.Sales$312,600 $768,000 Variable costs125,400 460,800Contribution margin$187,200 $307,200 Fixed costs115,200 115,200Income from operations$72,000 $192,000 
a.  Compute the operating leverage for Beck Inc. and Bryant Inc. If required, round to one decimal place.
Beck Inc.Bryant Inc.
b.  How much would income from operations increase for each company if the sales of each increased by 15%? If required, round answers to nearest whole number.
 DollarsPercentageBeck Inc.$%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

Solution a:

Operating leverage = Contribution / Operating income

Operating leverage - Beck Inc. = $187,200 / $72,000 = 2.6

Operating leverage - Bryant Inc. = $307,200 / $192,000 = 1.6

Solution b:

% increae in income from operations = % increase in sales * Operating leverage

If sales is increased by 15% then percentage increase in income of Beck Inc. = 15% * 2.60 = 39%

If sales is increased by 15% then percentage increase in income of Bryant Inc. = 15% * 1.60 = 24%

Solution c:

The difference in the percentage increase 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 higher percentage of contribution margin than are Bryant Inc.'s.