Question

Operating Leverage

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

	Beck Inc.		Bryant Inc.
Sales	$205,700		$585,000
Variable costs	(82,500)		(351,000)
Contribution margin	$123,200		$234,000
Fixed costs	(79,200)		(117,000)
Operating income	$44,000		$117,000

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 operating income 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.			%

Answer 1

Question A

Particulars	Beck Inc.	Bryant Inc.
Contribution Margin	123,200	234,000
÷ Operating Income	44,000	117,000
Operating Leverage	2.8 Times	2 Times

Question B

For Beck Inc.

Operating Leverage = % Change in Operating Income / % Change in Sales

% Change in Sales = 10%

Operating Leverage = 2.8 Times

% Change in Operating Income = ?

% Change in Operating Income = % Change in Sales * Operating Leverage

% Change in Operating Income = 10% * 2.8

% Change in Operating Income = 28%

Operating Income Increase by 28% after Increase in Sales by 10%

Change in Operating Income in Dollars = % Change in Operating Income * Operating Income before Increase in Sales

% Change in Operating Income = 28%

Operating Income before Increase in Sales = 44,000

Change in Operating Income in Dollars = 28% * 44,000

Change in Operating Income in Dollars = $ 12,320

Operating Income Increase by $ 12,320 after Increase in Sales by 10%.

For Bryant Inc.

Operating Leverage = % Change in Operating Income / % Change in Sales

% Change in Sales = 10%

Operating Leverage = 2 Times

% Change in Operating Income = ?

% Change in Operating Income = % Change in Sales * Operating Leverage

% Change in Operating Income = 10% * 2

% Change in Operating Income = 20%

Operating Income Increase by 20% after Increase in Sales by 10%

Change in Operating Income in Dollars = % Change in Operating Income * Operating Income before Increase in Sales

% Change in Operating Income = 20%

Operating Income before Increase in Sales = 117,000

Change in Operating Income in Dollars = 20% * 117,000

Change in Operating Income in Dollars = $ 23,400

Operating Income Increase by $ 23,400 after Increase in Sales by 10%.