Operating leverage is a measure of how much a company's profitability is affected by a change in sales. It is calculated by dividing a company's fixed costs by its total costs.
What does Total cost mean?
Total cost is the sum of all the costs associated with a purchase or project, including materials, labor, overhead, and any other associated fees. It is the total amount of money that must be paid to complete the purchase or project.
Data required to calculate degree of operating leverage for company A
The contribution margin is $90,000
The operating profit is $57,600
Degree of operating leverage = Contribution / operating profit
=$90,000 / $57,600
=1.5625 or 1.56
So, 1.56 is the Operating leverage of company A.
Data required to calculate degree of operating leverage for company B
The contribution margin is $126,000
The operating profit is $64,600
Degree of operating leverage = Contribution / operating profit
=$126,000 / $64,600
=1.9505 or 1.95
So, 1.95 is the Operating leverage of company B.
2)The required Data for comapny A:
The increase in sales turnover is 20%
The degree of operating leverage is 1.56 for company A
Change in profit percentage = increase in sales percentage x degree of operating leverage
= 20% x 1.56
=31.20 %
The increase in profit percentage would be 31.20% for company A
The required Data for comapny B:
The increase in sales turnover is 20%
The degree of operating leverage is 1.95 for company B
Change in profit percentage = increase in sales percentage x degree of operating leverage
= 20% x 1.95
=39 %
The increase in profit percentage would be 39% for company B
Hence Company B is expected a greater percentage.
Thus the Question variables are attached below;
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