Question

Operating Leverage

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

	Beck Inc.		Bryant Inc.
Sales	$425,900		$1,300,000
Variable costs	170,900		780,000
Contribution margin	$255,000		$520,000
Fixed costs	180,000		320,000
Income from operations	$75,000		$200,000

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 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

• All working forms part of the answer
• Requirement ‘c’ is already done by you.
• Requirement ‘a’

--Working

Working		Beck Inc.	Bryant Inc.
A	Contribution margin	$          255,000.00	$        520,000.00
B	Income from operations	$            75,000.00	$        200,000.00
C = A/B	Operating Leverage	3.4	2.6

--Answer

Beck Inc.	3.4
Bryant Inc.	2.6

• Requirement ‘b’

--Working

Working		Beck Inc.	Bryant Inc.
A	Increase in Sale	10%	10%
B	Operating Leverage	3.4	2.6
C = A x B	% change in Income	34%	26%
D	Current Income from operation	$            75,000.00	$        200,000.00
E = C x D	Increase in Income from Operation	$            25,500.00	$           52,000.00

--Answer

	Dollars	Percentage
Beck Inc.	$            25,500.00	34%
Bryant Inc.	$            52,000.00	26%