Question

Operating Leverage

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

	Beck Inc.		Bryant Inc.
Sales	$210,400		$561,000
Variable costs	84,400		336,600
Contribution margin	$126,000		$224,400
Fixed costs	56,000		37,400
Income from operations	$70,000		$187,000

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

Req A:
Operating Leverage = Total contribution/ Net Income
Beck INC: $126,000 /70,000 =1.8
Bryant INC: $224,400 / 187,000 = 1.2
		Operating Leverage
Beck Inc		1.8
Bryant Inc		1.2
Req b:
When sales increase by 10%,
Net income increase by:
Beck Inc =10*1.8 = 18%
Bryant Inc: 10*1.2 = 12%
Increase in $:
Beck inc =70,000*18% = $12,600
Bryant Inc = 187,000*12% = $22,440
INCREASE IN INCOME
		Dollar	%
BECK INC		12600	18%
BRYANT INC		22440	12%
Req C:
The difference in Higher % of Income fro operations is due to degree of operating leverage.
Beck Inc's Higher Operating leveerage means that its fixed cost are a higher % of contribution margin than that of Bryant.