The Solemn Company has an operating leverage of 2. Sales for 2014 are $100,000 with a contribution margin of $50,000. Sales are expected to be $150,000 in 2015. Operating income for 2015 can be expected to increase by what amount over 2014?

Question

Quizplus · Accepted Answer

Operating income will increase by $50,000. Operating leverage is the ratio of the percentage change in operating income to the percentage change in sales. In this case, the operating leverage is 2, which means that a 1% change in sales will result in a 2% change in operating income. Sales are expected to increase by 50% in 2015, so operating income can be expected to increase by 100% (2 x 50%). This represents an increase of $50,000 over 2014.

The Solemn Company Has an Operating Leverage of 2