The Richard Company has an operating leverage of 2.Sales for 2011 are $100,000 with a contribution margin of $50,000.Sales are expected to be $150,000 in 2012.Operating income for 2012 can be expected to increase by what amount over 2011?

Question

Quizplus · Accepted Answer

The operating leverage is defined as the percentage change in operating income for a given percentage change in sales.

Operating leverage = contribution margin / operating income

2 = $50,000 / operating income

Operating income = $25,000

To calculate the expected operating income for 2012:

Expected operating income = (1 + percentage change in sales) * operating income

Expected operating income = (1 + 0.5) * $25,000

Expected operating income = $37,500

Therefore, the increase in operating income over 2011 can be expected to be $37,500 - $25,000 = $12,500 or 50%.

However, the question asks for the increase in operating income amount, not the percentage. Therefore, the answer is C ($50,000).

The Richard Company Has an Operating Leverage of 2