Based on the income statements shown below,which division has the cost structure with the highest operating leverage? $\begin{array}{c}
\begin{array}{l}
\
\text {Revenue}\
\text {Variable costs}\
\text { Contribution margin }\
\text {Fixed costs}\
\text {Net income}\
\end{array}
\begin{array}{lll}
\text { Soft Drinks }\
\$50,000\
(10,000)\
40,000\
(30,000)\
\%10,000
\end{array}
\begin{array}{c}
\text { Bottled Water }\
\$ 50,000 \
(5,000) \
45,000 \
(40,000) \
\$ 5,000
\end{array}
\begin{array}{lll}
\text { Fruit Juices }\
\$50,000\
(30,000)\
20,000\
(10,000)\
\$10,000
\end{array}
\end{array}$

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? $\begin{array}{c}
\begin{array}{l}
\
\text {Revenue}\
 \text {Variable costs}\
\text { Contribution margin }\
\text {Fixed costs}\
 \text {Net income}\
\end{array}  
\begin{array}{lll}
\text { Soft Drinks }\
\$50,000\
(10,000)\
40,000\
(30,000)\
\%10,000 
\end{array}
\begin{array}{c}
\text { Bottled Water }\
\$  50,000 \
 (5,000) \
 45,000 \
 (40,000) \
 \$  5,000
\end{array}
\begin{array}{lll}
\text { Fruit Juices }\
\$50,000\
(30,000)\
20,000\
(10,000)\
\$10,000
\end{array}
\end{array}$

A) Bottled Water.
B) Fruit Juices.
C) Soft Drinks.
D) The three divisions have identical operating leverage.

Quizplus · Accepted Answer

Bottled Water division has the highest contribution margin ratio of 63% which implies that 63% of every dollar of sales revenue is available to cover fixed costs and to generate operating income. This high contribution margin ratio indicates that the Bottled Water division has a higher operating leverage than the other two divisions, which means that a small change in sales can have a significant impact on the operating income of the Bottled Water division. On the other hand, the Fruit Juices and Soft Drinks divisions have lower contribution margin ratios of 44% and 40%, respectively, indicating a lower operating leverage. Therefore, the best choice is A) Bottled Water.

Based on the Income Statements Shown Below,which Division Has the Cost