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Question - Income statements for two different companies in the same industry are as follows:
Alpha
Beta
Sales
500,000
Variable costs
350,000
200,000
Contribution margin
150,000
300,000
Fixed costs
100,000
250,000
Operating income
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.
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