Picasso”s Pantry is a chain of arts and crafts stores. Results for the most recent year are as follows:
|
Sales |
$9,000,000 |
|
|
Variable expenses |
$5,000,000 |
7,000,000 |
|
Fixed expenses |
2,000,000 |
$2,000,000 |
|
Total expenses Operating income |
Required
- What is Picasso”s Pantry”s degree of operating leverage?
- If sales increase by 5%, what will the new operating income be?
- Managers are considering changing Picasso”s cost structure by offering employees a commission on sales rather than a fixed salary. What effect would such a change have on the firm”s operating leverage?