If sales increase from $80,000 per year to $120,000 per year,and if the operating leverage is 5,then net income should increase by?

Question

Quizplus · Accepted Answer

Operating leverage is the degree to which a company uses fixed costs in its operations. A higher operating leverage means that a company has a higher proportion of fixed costs in its operations, which leads to higher profits when sales increase and vice versa.

In this case, the operating leverage is 5, which means that for every 1% increase in sales, the net income increases by 5%.

Therefore, the increase in sales from $80,000 to $120,000 represents a 50% increase.

Using the operating leverage formula:

% change in net income = % change in sales x operating leverage

% change in net income = 50% x 5 = 250%

Therefore, net income should increase by 250% or 2.5 times.

The closest option is C) 250%.

If Sales Increase from $80,000 Per Year to $120,000 Per