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Operating Leverage

Income statements for two different companies in the same industry are as follows:

		Trimax, Inc.		Quintex, Inc.
Sales		$500,000		$562,500
Less: Variable costs		250,000		112,500
Contribution margin		$250,000		$450,000
Less: Fixed costs		200,000		400,000
Operating income		$50,000		$50,000

Required:

1. Compute the degree of operating leverage for each company.

Trimax	fill in the blank 1
Quintex	fill in the blank 2

2. Compute the break-even point in dollars for each company.

Trimax, Inc.	$fill in the blank 3
Quintex, Inc.	$fill in the blank 4

Why is the break-even point for Quintex, Inc., higher?

Because it is less profitable.Because it must cover more in fixed expenses. Because its contribution margin ratio is lower.

3. Suppose that both companies experience a 50 percent increase in revenues. Compute the percentage change in profits for each company.

Trimax	fill in the blank 6	%
Quintex	fill in the blank 7	%