BREAK-EVEN SALES, OPERATING LEVERAGE, CHANGE IN INCOME 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 Required:

. Compute the degree of operating leverage for each company.

. Compute the break-even point for each company. Explain why the break-even point for Company B is higher.

. Suppose that both companies experience a 50 percent increase in revenues. Compute the percentage change in profits for each company. Explain why the percentage increase in Company B’s profits is so much larger than that of Company A.
Problem