Operating Leverage SunRise Inc. and SunSet Inc. have the following operating dat

Question

Operating Leverage SunRise Inc. and SunSet Inc. have the following operating data Sales Variable costs Contribution margin Fixed costs SunRise Inc. $209,400 (84,000) $125,400 (68,400) $57,000 SunSet Inc. $456,000 (273,600) $182,400 (30,400) $152,000 Operating income a. Compute the operating leverage for SunRise Inc. and SunSet Inc. Round the answers to one decimal place. SunRise Inc. SunSet Inc. b. How much would operating income increase for each company if the sales of each increased by 20%? Dollars Percentage SunRise Inc. SunSet Inc.

Explanation / Answer

Degree of operating leverage = contribution margin / net operating income

Sunrises inc

Degree of operating leverage = $125400 / $57000

= 2.2

Sunset inc

Degree of operating leverage = $182400 / $152000

= 1.2

b.

Sunrise inc Sunset inc

Sales $251280 $547200

Variable costs ($84000) ($273600)

Contribution margin $167280 $273600

Fixed cost ($68400) ($30400)

Net operating income $98880 $243200.

Percentage 73.47% 60%.

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