Problem
Operating Leverage
Varner Inc. and King Inc. have the following operating data:
|
Varner Inc.
|
King Inc.
|
|
Sales
|
$250,500
|
$600,000
|
|
Variable costs
|
100,500
|
360,000
|
|
Contribution margin
|
$150,000
|
$240,000
|
|
Fixed costs
|
75,000
|
40,000
|
|
Income from operations
|
$75,000
|
$200,000
|
a. Compute the operating leverage for Varner Inc. and King Inc. If required, round to one decimal place.
b. How much would income from operations increase for each company if the sales of each increased by 15%? If required, round answers to nearest whole number.
c. The difference in the increases of income from operations is due to the difference in the operating leverages. Varner Inc.'s higher operating leverage means that its fixed costs are a larger percentage of contribution margin than are King Inc.'s.