The following information is for Gable,Inc.and Harlowe,Inc.for the recent year. $$\begin{array} { l r r r }
& \text { Gable, Inc. } & \text { Harlowe, Inc. } \
\text { Sales } & \$ 800,000 & \$ 800,000 \
\text { Variable costs } & \underline{ 400,000 }& \underline{200,000 }\
\text { Contribution margin } & 400,000 & 600,000 \
\text { Fixed costs } & \underline{200,000 } & \underline{ 400,000} \
\text { Income from operations }& \underline{ \$ 200,000 }& \underline{ \$ 200,000}
\end{array}$$ Based on the above data,which company has a higher operating leverage?
A) Gable, Inc.
B) Harlowe, Inc.
C) Operating leverage is the same for both companies
D) Cannot be determined

Question

The following information is for Gable,Inc.and Harlowe,Inc.for the recent year. $$\begin{array} { l r r r } 
& \text { Gable, Inc. } & \text { Harlowe, Inc. } \
\text { Sales } & \$ 800,000 &  \$ 800,000 \
\text { Variable costs } & \underline{ 400,000 }&  \underline{200,000 }\
\text { Contribution margin } & 400,000 &  600,000 \
\text { Fixed costs } &  \underline{200,000 } & \underline{ 400,000} \
\text { Income from operations }& \underline{ \$ 200,000 }& \underline{ \$ 200,000}
\end{array}$$  Based on the above data,which company has a higher operating leverage?
A) Gable, Inc.
B) Harlowe, Inc.
C) Operating leverage is the same for both companies
D) Cannot be determined

Quizplus · Accepted Answer

Operating leverage is calculated as the contribution margin divided by the net operating income. Harlowe, Inc. has a higher operating leverage because it has a higher contribution margin relative to its net operating income. Gable, Inc. has a contribution margin of $400,000 and an income from operations of $200,000, resulting in an operating leverage of 2. Harlowe, Inc., with a contribution margin of $600,000 and the same income from operations of $200,000, results in an operating leverage of 3. Higher operating leverage indicates a higher proportion of fixed costs in the cost structure, which is the case with Harlowe, Inc.

The Following Information Is for Gable,Inc Based on the Above Data,which Company Has a Higher Operating