Income statements for two different companies in the same industry are as follows:
Company A Company B
Sales $ 500,000 $ 500,000
Less: Variable Costs 400,000 200,000
Contribution Margin 100,000 300,000
Less: Fixed Costs 50,000 250,000
Operating Income $ 50,000 $ 50,000
1.Calculate the degree of operating leverage for both companies.
2.Calculate the break-even point in $ for each company. Which company has the higher break-even point? Why?
3.Suppose both companies experience a 50% increase in sales. Calculate the percentage change in profits for each company. Explain why the percentage increase in Company B’s profits are so much larger than Company A’s.
Income statements for two different companies in the same industry are as follows:
Company A Company B
Sales $ 500,000 $ 500,000
Less: Variable Costs 400,000 200,000
Contribution Margin 100,000 300,000
Less: Fixed Costs 50,000 250,000
Operating Income $ 50,000 $ 50,000
1.Calculate the degree of operating leverage for both companies.
2.Calculate the break-even point in $ for each company. Which company has the higher break-even point? Why?
3.Suppose both companies experience a 50% increase in sales. Calculate the percentage change in profits for each company. Explain why the percentage increase in Company B's profits are so much larger than Company A's.