Comparing Operating Leverage Information is provided below from the annual reports of two manufacturing companies operating in different industries.
|
Solution Software, Inc. |
Fashion Clothing Co. |
|||
|
(In millions) |
Sales |
Earnings |
Sales |
Earnings |
|
2001 |
$4,600 |
$1,150 |
$3,800 |
$300 |
|
2002 |
6,000 |
1,500 |
4,800 |
400 |
|
2003 |
8,700 |
2,200 |
6,500 |
550 |
|
2004 |
11,400 |
3,500 |
9,200 |
800 |
|
2005 |
14,500 |
4,500 |
9,500 |
850 |
Required Prepare a graph to illustrate the relationship between each company’s earnings and its sales over the five years. Which company has the higher operating leverage? What effect does operating leverage have on the companies’ operating income?