Operating Leverage

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

		Trimax, Inc.		Quintex, Inc.
Sales		$320,000		$400,000
Less: Variable costs		160,000		80,000
Contribution margin		$160,000		$320,000
Less: Fixed costs		120,000		280,000
Operating income		$40,000		$40,000

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 60 percent increase in revenues. Compute the percentage change in profits for each company.

Trimax		%
Quintex		%