The Allen Corp. in 2016 had total revenues = $10 million, variable costs = $3 million, operating income of $5 million, and net income = $2 million. The operating leverage effect is
A) 1.4
B) 2.6
C) 3.5
D) 6.5

Question

Quizplus · Accepted Answer

The operating leverage effect is calculated as the ratio of the percentage change in operating income to the percentage change in sales. In this case, the operating income increased by 50% ($5 million / $3 million) while sales increased by 25% ($10 million / $8 million). Therefore, the operating leverage effect is 50% / 25% = 2.