Refer to the information in M6-12 for Laurel Company and Hardy Inc.

Required:

1. Calculate each company’s degree of operating leverage.

2. Explain why companies with the same total sales and net income have different degrees of operating leverage.

3. Compare these two companies’ vulnerability to market fluctuations.

Data from M6-12

Laurel Company and Hardy Inc. are separate companies that operate in the same industry.

Following are variable costing income statements for the two companies showing their different cost structures:

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Sales Variable Costs Contribution Margin Fixed Costs Net Income Laurel Co. $275,000 185,000 90,000 35,000 $ 55,000 Hardy Inc. $275,000 125,000 150,000 95,000 $ 55,000