Question

Operating Leverage

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

	Beck Inc.		Bryant Inc.
Sales	$238,500		$672,000
Variable costs	95,700		403,200
Contribution margin	$142,800		$268,800
Fixed costs	100,800		156,800
Income from operations	$42,000		$112,000

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 20%? If required, round answers to nearest whole number.

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

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.

Feedback

a. Divide the contribution margin by the income from operations.

b. What does the operating leverage show?

c. How does operating leverage affect operating income?

Learning Objective 5.

Answer 1

	operating leverage = contribution /net income
a)
						operating leverage
	Beck inc	(142800/42000)				3.4
	bryant inc	(268,800/112000)				2.4
b)				Dollars	percentage
	Beck inc			28,560	68%
	Bryant inc			53,760	48%
	beck inc =3.4*20=		68	%
			42000*68%=		28560
	Bryant
	2.4*20%=		48	%
		112000*48%=			53760
C)	increases
	higher