Question

Operating Leverage Beck Inc. and Bryant Inc. have the following operating data: Beck Inc. Bryant Inc. Sales $1,250,000 $2,000,000 Variable costs (750,000) (1,250,000) Contribution margin $500,000 $750,000 Fixed costs (400,000) (450,000) Operating income $100,000 $300,000 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 20%

Answer 1

Answer:

1. a. For Beck Inc = $5

b. For Bryant Inc. = 2.5

2. For Beck Inc = $100,000

For Bryant Inc. = $150,000

Explanation:

The computation of given question is shown below:-

a. Operating leverage = Contribution ÷ Net income

For Beck Inc

= $500,000 ÷ $100,000

= $5

For Bryant Inc.

= $750,000 ÷ $300,000

= $2.5

2. Operating income = Current Earning before interest and tax × Percentage increase in profit

For computing the operating income first we need to compute the increase in profit.

Increase in profit =  Operating leverage × Percentage

For Beck Inc. = $5 × 20%

= 100%

now we put into formula

= $1,00,000 × 100.00%

= $100,000

For Bryant Inc. = $2.5 × 20%

= 50%

now we put into formula

= $3,00,000 × 50%

= $150,000