Compute the degree of operating leverage for each company

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Question - Income statements for two different companies in the same industry are as follows:

 

Alpha

Beta

Sales

500,000

500,000

Variable costs

350,000

200,000

Contribution margin

150,000

300,000

Fixed costs

100,000

250,000

Operating income

50,000

50,000

Required -

(i) Compute the degree of operating leverage for each company.

(ii) Compute the break-even point for each company. Explain why the break-even point for Beta is higher.

(iii) Suppose that both companies experience a 50% increase in revenues, compute the percentage change in profits for each company. Explain why the percentage increase in Beta's profits is so much greater than that of Alpha.

Reference no: EM132859515

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