Question

Bendel Inc. has an operating leverage of 4.2. If the company's sales increase by 14%, its net operating income should increase by about:

Multiple Choice

• 58.8%

• 3.3%

• 14.0%

• 43.2%

Answer 1

Answer) 58.8%

Explanation

% increase in net operating income = % increase in sales X operating leverage

= 14 % X 4.2

= 58.8%

Please refer to the below Illustration for better understanding

	500 units	580 units
Sales	$ 250,000	$ 290,000
Variable	150,000	179,800
Contribution margin	100,000	110,200
Less : Fixed expenses	80,000	80,000
Net operating income (EBIT)	$ 20,000	$ 30,200

Operating leverage = % change in EBIT / % change in sales

% change in EBIT = (30,200 -20,000) / 20,000 X 100

= 10,200 / 20,000 X 100

= 51%

% change in sales = (290,000 - 250,000) / 250,000 X 100

= 40,000 / 250,000 X 100

= 16%

Operating leverage = 51% / 16%

= 3.1875

SO AS PER ABOVE EXPLANATION WE CAN CALCULATE INCREASE IN NET OPERATING INCOME BY:

Sales increase by 16 % and operating leverage is 3.1875 its net operating income increases by :

% increase in net operating income = % increase in sales X operating leverage

=16 X 3.1875 = 51%