The Solemn Company has an operating leverage of 2. Sales for the current year are $100,000 with a contribution margin of $50,000. Sales are expected to be $150,000 in next year. Operating income for the current year can be expected to increase by what amount over the previous year?

Question

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The operating leverage is 2, which means that a 1% change in sales will result in a 2% change in operating income. Sales are expected to increase by 50% from $100,000 to $150,000. Therefore, operating income is expected to increase by 100% (2 x 50%). The current operating income is $50,000, so the expected increase in operating income is $50,000.

The Solemn Company Has an Operating Leverage of 2