The following information is available for the Blue and Red Companies for 2011

Blue

Red

Sales (200,000 units)

$1,800,000

$1,800,000

Variable costs

800,000

1,200,000

Contribution margin

1,000,000

600,000

Fixed costs

500,000

100,000

Net operating income

$500,000

$500,000

1. Compute the operating leverage for each company and explain what operating leverage measures.
2. If both companies experience a 20% increase in sales volume, will they continue to have the same net operating income? Why or why not? Explain your answer with respect to each company's operating leverage.