Operating Leverage Income statements for two different companies in the same industry are as follows: Trimax, Inc. Quintex, Inc. Sales $500,000 $500,000 Less: Variable costs 250,000 100,000 Contribution margin $250,000 $400,000 Less: Fixed costs 200,000 350,000 Operating income $50,000 $50,000 Required: 1. Compute the degree of operating leverage for each company. Trimax Quintex 2. Compute the break-even point in dollars for each company. Trimax, Inc. $ Quintex, Inc. $ Why is the break-even point for Quintex, Inc., higher? Because it must cover more in fixed expenses. 3. Suppose that both companies experience a 50 percent increase in revenues. Compute the percentage change in profits for each company. Trimax % Quintex % Feedback 1. See Cornerstone 16.7. Operating leverage is concerned with the relative mix of fixed costs and variable costs in an organization. It is sometimes possible to trade off fixed costs for variable costs. As variable costs decrease, the unit contribution margin increases, making the contribution of each unit sold that much greater. The mix of costs that an organization chooses can have a considerable influence on its operating risk and profit level. 2. See Cornerstone 16.2. 3. Operating leverage is a factor in calculating an increase in profits.