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Operating Leverage
Income statements for two different companies in the same industry are as follows:
| | | Trimax, Inc. | | Quintex, Inc. |
| Sales | | $300,000 | | $337,500 |
| Less: Variable costs | | 150,000 | | 67,500 |
| Contribution margin | | $150,000 | | $270,000 |
| Less: Fixed costs | | 120,000 | | 240,000 |
| Operating income | | $30,000 | | $30,000 |
Required:
1. Compute the degree of operating leverage for each company.
2. Compute the break-even point in dollars for each company.
| Trimax, Inc. | $ |
| Quintex, Inc. | $ |
Why is the break-even point for Quintex, Inc., higher?
3. Suppose that both companies experience a 40 percent increase in revenues. Compute the percentage change in profits for each company.
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