Operating Leverage

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

		Trimax, Inc.		Quintex, Inc.
Sales		$560,000		$875,000
Less: Variable costs		280,000		175,000
Contribution margin		$280,000		$700,000
Less: Fixed costs		210,000		630,000
Operating income		$70,000		$70,000

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