Question

Operating Leverage

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

	Beck Inc.		Bryant Inc.
Sales	$258,500		$747,500
Variable costs	103,700		448,500
Contribution margin	$154,800		$299,000
Fixed costs	111,800		184,000
Income from operations	$43,000		$115,000

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

Beck Inc.	fill in the blank 1
Bryant Inc.	fill in the blank 2

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.	$fill in the blank 3	fill in the blank 4	%
Bryant Inc.	$fill in the blank 5	fill in the blank 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.

Answer 1

a) Degree of operating leverage= Contribution margin/Operating income

Beck Inc.= $154,800/43,000= 3.6

Bryant Inc= $299,000/115,000= 2.6

Beck Inc.	3.6
Bryant Inc.	2.6

b) Degree of operating leverage= Percentage change in operating income/Percentage change in sales

Beck Inc.

3.6= Percentage change in operating income/10%

Percentage change in operating income= 10%*3.6= 36%

Increase in operating income= $43,000*36%= $15,480

Bryant Inc.

2.6= Percentage change in operating income/10%

Percentage change in operating income= 10%*2.6= 26%

Increase in operating income= $115,000*26%= $29,900

	Dollars	Percentage
Beck Inc.	$15,480	36	%
Bryant Inc.	$29,900	26	%

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.

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