Garmo Co. has an operating leverage of 5. Next year's sales are expected to increase by 10%. The company's operating income will increase by 50%.

Question

Quizplus · Accepted Answer

Operating leverage is defined as the percentage change in operating income that results from a percentage change in sales. In this case, the operating leverage of 5 means that for every 1% increase in sales, the operating income will increase by 5%.

If next year's sales increase by 10%, then the operating income will increase by 5% x 10% = 50%, which matches the given information. Therefore, the answer is A.

Garmo Co Has an Operating Leverage of 5