Picasso’s Pantry is a chain of arts and crafts stores. Results for the most recent year are as follows:

Required

a. What is Picasso’s Pantry’s degree of operating leverage?

b. If sales increase by 8%, what will the new operating income be?

c. Managers are considering changing Picasso’s cost structure by offering employees a commission on  sales rather than a fixed salary. What effect would such a change have on the firm’s operating leverage?

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Sales revenue $8,000,000 Variable expenses $4,400,000 Fixed expenses 2,600,000 Total expenses 7,000,000 Operating income $1,000,000