PART VI OPERATING LEVERAGE

The following CVP income statements are available for Eloise Company and Teadora Company.

Eloise Company Teadora Company

Sales revenue $800,000 $800,000

Variable costs 325,000 195,000

Contribution margin 475,000 605,000

Fixed costs 375,000 505,000

Net income $100,000 $100,000

Instructions

(a) Compute the degree of operating leverage for each company.

(b) Prepare a CVP income statement for each company, assuming that sales revenue decreases by 30%.