Question:
OPERATING LEVERAGE
Income statements for two different companies in the same industry are as follows:
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Trimax, Inc.
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Quintex, Inc.
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Sales
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$500,000
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$500,000
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Less: Variable costs
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250,000
|
100,000
|
|
Contribution margin
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$250,000
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$400,000
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Less: Fixed costs
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200,000
|
350,000
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Operating income
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$ 50,000
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$ 50,000
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Required:
1. Compute the degree of operating leverage for each company.
2. Compute the break-even point for each company. Explain why the break-even point for Quintex, Inc., is higher.
3. Suppose that both companies experience a 50 percent increase in revenues. Compute the percentage change in profits for each company. Explain why the percentage increase in Quintex's profits is so much greater than that of Trimax.