Operating Leverage

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

		Trimax, Inc.		Quintex, Inc.
Sales		$700,000		$700,000
Less: Variable costs		350,000		140,000
Contribution margin		$350,000		$560,000
Less: Fixed costs		280,000		490,000
Operating income		$70,000		$70,000

Required:

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

Trimax	5
Quintex	8

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 its contribution margin ratio is lower.

3. Suppose that both companies experience a 60 percent increase in revenues. Compute the percentage change in profits for each company.

Trimax	_________	%
Quintex	_________	%