OPERATING LEVERAGE
Income statements for two different companies in the same industry are as follows:
|
|
Trimax, Inc. |
Quintex, Inc. |
|
Sales |
$500,000 |
$500,000 |
|
Less: Variable costs |
250,000 |
100,000 |
|
Contribution margin |
$250,000 |
$400,000 |
|
Less: Fixed costs |
200,000 |
350,000 |
|
Operating income |
$ 50,000 |
$ 50,000 |
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.