Operating Leverage Varner Inc. and King Inc. have the following operating data:

Question

Operating Leverage Varner Inc. and King Inc. have the following operating data: Varner Inc. $235,100 94,300 $140,800 96,800 $44,000 King Inc. Sales Variable costs Contribution margin Fixed costs Income from operations a. Compute the operating leverage for Varner Inc. and King Inc. If required, round to one decimal place Varner Inc King Inc. b. How much would income from operations increase for each company if the sales of each increased by 15%? If required, round answers to nearest whole number $760,500 456,300 $304,200 187,200 $117,000 Dollars Percentage Varner Inc. King Inc. c. The difference in the of income from operations is due to the difference in the operating leverages. Varner Inc.'s operating leverage means that its fixed costs are a -percentage of contribution margin than are King Inc.'s. Check My Work Previous Next

Explanation / Answer

(a)Calculation of Operating Leverage

Operating Leverage = Contribution Margin / Income from Operations

Varner Inc.

Operating Leverage = $140800 / 44000 = 3.20

King Inc.

Operating Leverage = $304200 / 117000 = 2.60

(b). How much would income from operations increase for each company if the sales of each increased by 15% ?

Varner Inc.

(3.20 x 15% = 48%)

(48% x 44000 = $21,120)

King Inc.

(2.60 x 15% = 39%)

(39% x 117000 = $45,630)

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