Bendel Incorporated has an operating leverage of 7.3. If the company's salesvolume increases by 3%, its net operating income should increase by about:
A) 243.3%
B) 7.3%
C) 21.9%
D) 3.0%

Question

Quizplus · Accepted Answer

Operating leverage is a ratio of fixed costs to total costs. Mathematically, operating leverage = contribution margin/net operating income.

Given operating leverage = 7.3, it means contribution margin constitutes a larger proportion of total costs as compared to fixed costs.

If sales volume increases by 3%, the contribution margin would increase by 3% as well (assuming no change in selling price or variable cost per unit). Since operating leverage is high, this increase in contribution margin will lead to a proportionately higher increase in net operating income.

Mathematically, the percentage increase in net operating income = operating leverage x percentage increase in sales volume.

Therefore, the percentage increase in net operating income = 7.3 x 3% = 21.9%.

Hence, the correct answer is C) 21.9%.

Bendel Incorporated Has an Operating Leverage of 7