The following sales and cost data (000s) are for two companies in the transportation industry:     

Required:

1. Calculate the degree of operating leverage (DOL) for each company. If sales increase from the present level, which company benefits more? How do you know?

2. Assume that sales rise 20% in the next year but that everything else remains constant. Calculate the percentage increase in profit for each company. Are the results what you expected? Explain.

Company A Company B Amount Percent of Sales Amount Percent of Sales Sales $100,000 50,000 100% $100,000 30,000 100% Variable costs 50 30 Contribution margin Fixed costs $ 50,000 15,000 $ 70,000 40,000 50% 70% Operating profit $ 35,000 $ 30,000