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.
Beck Inc.
Bryant Inc.
b. How much would income from operations increase for each company if the sales of each increased by 20%? 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

a. Beck Inc. = 5.00 and Bryant Inc. = 2.50

b. Beck Inc. = $100,000 and 100% : Bryant Inc. = $150,000 and 50 %

c. True.

Step-by-step explanation:

Degree of Operating Leverage shows, the times Earnings Before Interest and Tax (EBIT) would change as a result of a change in Sales contribution.

Degree of Operating Leverage = Contribution ÷ EBIT

Thus,

Beck Inc = $500,000 ÷ $100,000

= 5.00

Bryant Inc. = $750,000 ÷ $300,000

= 2.50

If Sales increased by 20% the effects on Incomes would be :

Beck Inc = 20% × 5.00

= 100%

= $100,000 × 100%

= $100,000

Bryant Inc.= 20% × 2.50

= 50 %

= $300,000 × 50 %

= $150,000