Based on the income statements shown below, which division has the cost structure with the highest operating leverage?
A) Bottled Water.
B) Fruit Juices.
C) Soft Drinks.
D) The three divisions have identical operating leverage.

Question

Based on the income statements shown below, which division has the cost structure with the highest operating leverage? 
A) Bottled Water. 
B) Fruit Juices. 
C) Soft Drinks. 
D) The three divisions have identical operating leverage.

Quizplus · Accepted Answer

Magnitude of operating leverage = Contribution margin ÷ Net income
Soft drinks: Magnitude of operating leverage = $40,000 ÷ $10,000 = 4.0
Bottled water: Magnitude of operating leverage = $45,000 ÷ $5,000 = 9.0
Fruit juices: Magnitude of operating leverage = $20,000 ÷ $10,000 = 2.0

Based on the Income Statements Shown Below, Which Division Has