Question

Operating Leverage

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

	Beck Inc.		Bryant Inc.
Sales	$315,300		$1,027,000
Variable costs	126,500		616,200
Contribution margin	$188,800		$410,800
Fixed costs	129,800		252,800
Income from operations	$59,000		$158,000

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.	$		%

Answer 1

Ans.

a)

	Beck Inc	Bryant Inc
Sales	$            315,300.00	$                                1,027,000.00
Variable cost	$            126,500.00	$                                   616,200.00
Contribution margin	$            188,800.00	$                                   410,800.00
Fixed Costs	$            129,800.00	$                                   252,800.00
Net Income	$              59,000.00	$                                   158,000.00
Degree of Operating Leverage	3.2	2.6

Degree of Operating Leverage = Contribution Margin / Net Income

b)

Degree of operating leverage = % change in EBIT / % changes in sales

If Degree of operating leverage is 3.2 and change in sales is 10% then change in net income will be (10% x 3.2)= 32% in case of Beck inc and (2.6 x 10%) = 26% in case of Bryant inc.

	Dollars	Percentage
Beck Inc	$              77,880.00	32%
Bryant inc	$            199,080.00	26%