Juras Inc. and Hinson Inc. have the following operating data: Sales Juras $160,0

Question

Juras Inc. and Hinson Inc. have the following operating data: Sales Juras $160,000 HInson $215,000 Variable costs $130,000 115,000 Contribution margin 30,000 100,000 Fixed costs 20,000 75,000 Income from operations 10,000 25,000 (a)Compute the operating leverage for Juras Inc. and Hinson Inc. (b) How much would income from operations increase for each company if the sales of each increased by 10% (c) Why is there a difference in the increase in income from operations for the two companies? Explain.

Explanation / Answer

a. Operating leverage: Juras: (160,000 - 130,000)/10,000 = 3 Hinson: (215,000 - 115,000)/25,000 = 4 b. Juras: 10%*3 = 30% 30%*10,000 = $3,000 increase Hinson: 10%*4 = 40% 40%*25,000 = $10,000 increase c. There is a difference because a 10% increase for Hinson would be larger than for Juras because it is starting with a larger sales volume and it is also larger because the operating leverage is higher.

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