Beck Inc. and Bryant Inc. have the following operating data: Beck Inc. Bryant Inc. Sales $1,250,000 $2,000,000 Variable costs 750,000 1,250,000 Contribution margin $500,000 $750,000 Fixed costs 400,000 450,000 Income from operations $100,000 $300,000 a. Compute the operating leverage for Beck Inc. and Bryant Inc. If required, round to one decimal place.

For Beck Inc, operating leverage is 5

For Bryant Inc, operating leverage is 2.5

Explanation:

Operating leverage measures fixed cost to total cost and the extent to which the operating income can be increased as a result of increase in revenue. Sales of high gross margin and low variable costs leads to high operating leverage. Operating leverage is the ratio of contribution margin to Income from operations .

Given:      

                                                      Beck Inc                  Bryant Inc

Sales                                              $1250000               $2000000

Variable cost                                 $750000                 $1250000

Contribution margin                      $500000                $750000

Fixed costs                                     $400000                $450000

Income from operations                $100000                 $300000

For Beck Inc, operating leverage = contribution margin/income from operations = $500000/$100000 = 5

For Bryant Inc, operating leverage = contribution margin/income from operations = $750000/$300000 = 2.5

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