The Chi Corp. in 2016 had revenues of $12,000, variable costs of $6,000, fixed operating costs of $2,000, interest expenses of $1,000, no taxes, and net income = $3,000. The operating leverage effect for this company is
A) 1.333
B) 1.5
C) 3
D) 4

Question

Quizplus · Accepted Answer

Operating leverage effect = % change in net income / % change in revenues

Using the given information:

2016 Revenues=$12,000
Variable costs=$6,000
Fixed operating costs=$2,000
Net income=$3,000

Contribution Margin (CM) = Revenues - Variable Costs
CM = $12,000 - $6,000 = $6,000

Operating Income = CM - Fixed Costs - Interest Expenses
Operating Income = $6,000 - $2,000 - $1,000 = $3,000

% change in net income = ($3,000 - $0) / $3,000 = 100%
% change in revenues = ($12,000 - $9,000) / $9,000 = 33.33%

Operating leverage effect = 100% / 33.33% = 3

Therefore, the answer is C) 3.