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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
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 |
Required:
| A. | Compute the operating leverage for each company. Record your answer to one decimal place, if necessary. | |
| Blue Company's operating leverage: | ||
| Red Company's operating leverage: | ||
| Explain what operating leverage measures. The input in the box below will not be graded, but may be reviewed and considered by your instructor. | ||
| B. | If both companies experience a 20% increase in sales volume, will they continue to have the same net operating income? | |
| SelectYesNoItem 4 | ||
| Why or why not? Explain your answer with respect to each company's operating leverage. The input in the box below will not be graded, but may be reviewed and considered by your instructor. | ||
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Case Studies In Forensic Accounting And Fraud Auditing
Authors: Professor D. Larry Crumbley, Wilson LaGraize, Christopher E. Peters
2nd Edition
0808041932, 978-0808041931
