Question

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 Income from operations $100,000 $300,000 a. Compute the operating leverage for Beck Inc. and Bryant Inc. If required, round to one decimal place.

Answer 1

For Beck Inc, operating leverage is 5

For Bryant Inc, operating leverage is 2.5

Step-by-step explanation:

Operating leverage measures fixed cost to total cost and the extent to which the operating income can be increased as a result of increase in revenue. Sales of high gross margin and low variable costs leads to high operating leverage. Operating leverage is the ratio of contribution margin to Income from operations .

Given:

Beck Inc Bryant Inc

Sales $1250000 $2000000

Variable cost $750000 $1250000

Contribution margin $500000 $750000

Fixed costs $400000 $450000

Income from operations $100000 $300000

For Beck Inc, operating leverage = contribution margin/income from operations = $500000/$100000 = 5

For Bryant Inc, operating leverage = contribution margin/income from operations = $750000/$300000 = 2.5

Answer 2

A. 5 Beck Inc and 2.5 Bryant Inc

B. Beck inc$100,000 and Bryant inc

$150,000

Step-by-step explanation:

a. Operating Leverage = Contribution Margin / Income from Operations BeckInc.

Operating Leverage = $500,000 / 100,000 = 5 Beck inc

Operating Leverage = $750,000 / 300,000 = 2.5 Bryant Inc

b. Dollars Percentage

Beck 5*20% = 100

100%100,000 = $100,000

Bryant 2.5*20% = 50% ×$300,000 =$150,000

c. The difference in the increases of income from operations is due to the difference that occurred in the operating leverages. Beck Inc.'s higher operating leverage means that its fixed costs are a larger percentage of contribution margin than are Bryant Inc.