The Richard Company has an operating leverage of 2.Sales for the current year are $100,000 with a contribution margin of $50,000.Sales are expected to be $150,000 for the following year.Operating income for the following year can be expected to increase by what amount over the current year?

Question

Quizplus · Accepted Answer

First calculate the current year's operating income:
$50,000 (contribution margin) - $25,000 (fixed costs) = $25,000 (operating income)
Next, calculate the expected operating income for the following year:
$75,000 (contribution margin, calculated as $150,000 x 0.5) - $25,000 (same fixed costs) = $50,000 (operating income)
The increase in operating income from current year to following year is:
$50,000 (following year operating income) - $25,000 (current year operating income) = $25,000
Therefore, the answer is (D) $50,000.

The Richard Company Has an Operating Leverage of 2