   Chapter 21, Problem 21.25EX

Chapter
Section
Textbook Problem

Operating leverageBeck 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. b.  How much would income from operations increase for each company if the sales of each increased by 20%? c.  Why is there a difference in the increase in income from operations for the two companies? Explain.

a.

To determine

Operating leverage: It is a ratio that measures the proportion of fixed cost on the total costs and the extent to which the changes in the sales volume affects the income from operations. It shows the relationship between the contribution margin and income from operations. The formula to calculate the operating leverage is as follows:

Operatingleverage=ContributionMarginIncomefromoperations

To determine: the operating leverage for Be Incorporation and Br Incorporation.

Explanation

Determine the operating leverage:

For Be Incorporation

Contribution margin =$500,000 Income from operations =$100,000

Operatingleverage=ContributionMarginIncomefromoperations=$500,000$100,000=5

b.

To determine
the increase in income from operations for Be Incorporation and Br Incorporation with the increase in sales of 20%.

c.

To determine

To explain: the difference in the increase in income from operations for the two companies.

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