Question

Based on the income statements of the three following retail businesses, which company has the highest operating leverage?Alpha Company -Revenue $200,000 -Variable costs ($95,000)-Contribution margin $105,000-Fixed costs ($80,000)-Net income $25,000Beta Company-Revenue $200,000-Variable costs ($155,000)-Contribution margin $45,000-Fixed costs ($20,000)-Net income $25,000Gamma Company-Revenue $200,000-Variable costs ($125,000)-Contribution margin $75,000-Fixed costs ($50,000)-Net income $25,000

Answer 1

Answer:

The Alpha company has higher operating leverage than the beta company and the gamma company.

Explanation:

The formula to compute the operating leverage is shown below:

Operating leverage = Contribution ÷ Net income

For Alpha company,

The operating leverage equals to

= $105,000 ÷ $25,000

= 4.2

For Beta company,

The operating leverage equals to

= $45,000 ÷ $25,000

= 1.8

For Gamma company,

The operating leverage equals to

= $75,000 ÷ $25,000

= 3

Among these three companies, the Alpha company has higher operating leverage than the beta company and the gamma company