Operating Leverage Problem
Consolidated Industries operates in five different industries and includes five separate divisions within its operating structure. Select information for each of these divisions follows.
Required: Calculate the degree of operating leverage for each of the divisions. Then, address the two questions that follow related to the impact on income for each division.
|
Natural Resources
|
Chemicals
|
Distribution
|
Consumer Goods
|
Finance
|
|
Sales
|
10,000,000
|
10,000,000
|
10,000,000
|
10,000,000
|
10,000,000
|
|
Variable expenses
|
5,000,000
|
5,000,000
|
5,000,000
|
5,000,000
|
5,000,000
|
|
Contribution margin
|
5,000,000
|
5,000,000
|
5,000,000
|
5,000,000
|
5,000,000
|
|
Fixed expenses
|
4,000,000
|
3,000,000
|
2,000,000
|
1,000,000
|
500,000
|
|
Net operating income
|
1,000,000
|
2,000,000
|
3,000,000
|
4,000,000
|
4,500,000
|
Degree of operating leverage
What would be the impact on income if sales increase 20%?
What would be the impact on income if sales decrease 30%?