Please help me with this practice question! I just need shown how to do it! Comp

Question

Please help me with this practice question! I just need shown how to do it!

Company A and Company B are competitors.  Information on the cost structures of Company A and B is presented below:

Company A                             Company B

Contribution Margin               $450,000                                 $530,000

Net Income                             $115,000                                 $125,000

Calculate the operating leverage for both Company A and Company B.  How would the net income change for both companies if sales were to increase by 5%?  How would net income change for both companies if sales were to decrease by 7%? How can Company A and B use this information to make strategic decisions within their company?

Explanation / Answer

Company A Company B Contribution margin 450000 530,000.00 Divide: Net income 115000 125000 Degree of Operating leverage 3.91 4.24 If sales increase by 5% Net income increase 19.55% 21.20% If Sales decrease By 7% Net income decrease 27.37% 29.68% As can be observed, Company B is more prone to change in income due to change in sales. Therefore, Company B shall concnetrate more on unit product sales so as to increase in income.

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