Question

perating Leverage

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

	Beck Inc.		Bryant Inc.
Sales	$276,600		$736,000
Variable costs	111,000		441,600
Contribution margin	$165,600		$294,400
Fixed costs	96,600		110,400
Income from operations	$69,000		$184,000

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

• All working forms part of the answer
• Requirement [a]

		Beck Inc	Bryant Inc
A	Contribution margin	$165,600	$294,400
B	Income from Operations	$69,000	$184,000
C = A / B	Operating Leverage	2.4	1.6

• Requirement [b]

	Dollars	Percentage
Beck Inc	$16,560	24%
Bryant Inc	$29,440	16%

--Working

		Beck Inc	Bryant Inc
A	Increase % in Sales	10%	10%
B	Operating Leverage	2.4	1.6
C = A x B	% Increase in income from Operation	24%	16%
D	Current income from operations	$69,000	$184,000
E = C x D	Increase in income from Operations	$16,560	$29,440

• [c]

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