What is the difference in meaning between Contribution Margin Ratio and Operating Leverage Factor when showing the % change in sales revenue on the % change in net income?

A falls between these two extremes with a contribution-margin ratio of 40 percent. Suppose sales revenue increases by 10 percent, or $50,000, in each company. The resulting increase in each company's profit is calculated in Exhibit 7-7. Notice that company B, with its high variable expenses and low contribution-margin ratio, shows a relatively low percentage increase in profit. In contrast, the high fixed expenses and large contribution-margin ratio of company C result in a relatively high percentage increase in profit. Company A falls in between these two extremes. Increase In Sales Revenue Contribution Margin Ratio Increase In Net Income Percentage Increase in Net Income Exhibit 7-7 Effect on Profi Sales Revenue $50,000 40% $20,000 40% ($20,000 - $50,000) Digital Company A (Digital Time) Company B (high variable expenses) Company (high fixed expenses) $50,000 20% $10,000 20% ($10,000 - $50,000) $50,000 90% = $45,000 90% ($45,000 = $50,000) *This form of income statement, in which each item on the statement is expressed as a percentage of sales revenue. is often called a common-size income statement. 295 (326 / 849) the Chap007P... Company A (Digital Time) Company B (high variable expenses) Company C (high fixed expenses) 4 $200,000 $100,000 $450,000 $50,000 $50,000 $50,000 2 9 The operating leverage factor is a measure, at a particular level of sales, of the per- centage impact on net income of a given percentage change in sales revenue. Multiplying the percentage change in sales revenue by the operating leverage factor yields the per- centage change in net income. Percentage Increase in Sales Revenue X Operating Leverage Factor Percentage Change in Net Income 4 Company A (Digital Time) Company B (high variable expenses) Company C (high fixed expenses) 10% 10% 10% X X X 40% 20% 2 9 | 11 90% The percentage change in net income shown above for each company may be verified by re-examining Exhibit 77. Break-Even Point and Safety Margin A firm's operating leverage also affects its break-even point. Since a firm with relatively high operating leverage has proportionally high fixed expenses, the firm's break-even point will be relatively high. This fact is illus- trated using the data from Exhibit 7-6