If company A increases its revenue from $1,500 to $1,650 and profit for the year from $400 to $470, while company B increases its revenue from $600 to $660 and profit for the year from $35 to $50, what impact will the results have on the companies operating leverage?

Question

Quizplus · Accepted Answer

Operating leverage is demonstrated when a company's revenue growth translates into a larger percentage increase in operating income due to fixed costs remaining constant. Company A's revenue increased by 10% ($150/$1500) and its profit by 17.5% ($70/$400), while Company B's revenue increased by 10% ($60/$600) and its profit by 42.9% ($15/$35). Company B's profit increased by a higher percentage than Company A's for the same percentage increase in revenue, indicating a more favorable operating leverage.

If Company a Increases Its Revenue from $1,500 to $1,650