Business Applications Operating leverage Description of Business for Caterpillar, Inc.
Caterpillar is the leader in construction and mining equipment and diesel and natural gas engines and industrial gas turbines in our size range. The company is also a leading services provider through Cat Financial, Caterpillar Logistics Services Inc., and Caterpillar Remanufacturing Services Inc. Annual sales and revenues are $41.517 billion, making Caterpillar the largest manufacturer in our industry. Caterpillar is also a leading U.S. exporter. Through a global network of independent dealers, Caterpillar builds long term relationships with customers around the world. For over 80 years, the Caterpillar name has been associated with the highest level of quality products and services.
|
Caterpillar, Inc. |
2006 |
2005 |
|
Operating revenue |
$41,517 |
$36,339 |
|
Operating earnings |
4,921 |
3,784 |
Description of Business for Sonic Corporation
Sonic Corp. (the Company”) operates and franchises the largest chain of drive in restaurants (Sonic Drive Ins”) in the United States. As of August 31, 2006, the Company had 3,188 Sonic Drive Ins in operation, consisting of 623 Partner Drive Ins and 2,565 Franchise Drive Ins, principally in the southern two thirds of the United States. We own a majority interest, typically at least 60%, and the supervisor and manager of the drive in own a minority interest in each Partner Drive In, which are owned and operated as either a limited liability company or general partnership. Franchise Drive Ins are owned and operated by our franchisees. At a typical Sonic Drive In, a customer drives into one of 24 to 36 covered drive in spaces, orders through an intercom speaker system, and has the food delivered by a carhop within an average of four minutes. Most Sonic Drive Ins also include a drive through lane and patio seating.
|
Sonic Corporation |
2006 |
2005 |
|
Operating revenue |
$693.3 |
$623.1 |
|
Operating earnings |
131.6 |
117.4 |
Required
a. Determine which company appears to have the higher operating leverage.
b. Write a paragraph or two explaining why the company you identified in Requirement a might be expected to have the higher operating leverage.
c. If revenues for both companies declined, which company do you think would likely experience the greatest decline in operating earnings? Explain your answer.