You have recently completed principles of managerial accounting and have started your own consulting firm. You have been hired by Hats Are Us, a manufacturer and distributor of custom baseball caps for major league baseball teams in the United States. Your client has a low degree of operating leverage and a low contribution margin. They are interested in exploring ways to raise their degree of operating leverage and increase their contribution margin. They believe the market for baseball caps is high and they are willing to make some decisions and investments to take advantage of the forthcoming demand.

In your essay:

1. Define contribution margin and operating leverage

2. Explain why Hats Are Us might have a low contribution margin and low degree of operating leverage

3. Describe what they can do to increase their contribution margin and degree of operating leverage

4. If they were to do the things you discuss in item 3, what should they expect to see happen in their profitability measures?