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Amazon.com Home I WINGS University Google Plot Apple Bing Google Yahoo Rent Connect nnect Assignment Company A is a manufacturer with current sales of $3.00000 and a 60% contribution margin. Its fixed costs equal SL350000. Company B is a consulting firm with current service revenues of $3,000 and a 30% contribution margin lts fixed costs equal $420,000 Compute the degree of operating leverage (DOL) for each company. eh Print of Oper Compary B identify which company benetts more trom a 20% increase in sales. Company A Company B so, 2 5

Explanation / Answer

Ans- Contribution Margin Income Statement

Degree of operating leverage

Company A benefits more from a 20% increase in sales.

Company A- Variable costs($ 3,100,000* 100%-60%)= $1,240,000

Contribution margin ($3,100,000* 60%)= 1,860,000

Company B

Variable costs ($3,000,000*100%-30%)= $2,100,000

Contribution margin ($3,000,000*30%)= $900,000

Interpretation: Company A benefits more from a 20% increase in sales.This is because we expect a 20% increase in sales to yield a 72% increase in income(computed as 3.6*20%). For Company B we expect a 20% increase in sales to yield a 38% increase in income (computed as 1.9* 20%). Note that although Company A 's Fixed costs are higher, its increase in income is greater than that for company B due to its higher degree of operating leverage(3.6 versus 1.9).

Company A Company B Sales $ 3,100,000 $ 3,000,000 Variable costs 1,240,000 2,100,000 Contribution margin 1,860,000 900,000 Fixed costs 1,350,000 420,000 Pretax Income $ 510,000 $ 480,000

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