Based on the income statements of the three following retail businesses, which company has the highest operating leverage? $$\begin{array} { | l | r | r | r | }
\hline & { \text { Alpha Company } } & { \text { Beta Company } } & \text { Gamma Company } \
\hline \text { Revenue } & \$ 200,000 & \$ 200,000 & \$ 200,000 \
\hline \text { Variable costs } & ( 95,000 ) & ( 155,000 ) & ( 125,000 ) \
\hline \text { Contribution margin } & \$ 105,000 & \$ 45,000 & \$ 75,000 \
\hline \text { Fixed costs } & ( 80,000 ) & ( 20,000 ) & ( 50,000 ) \
\hline \text { Net income } & \$ 25,000 & \$ 25,000 & \$ 25,000 \
\hline
\end{array}$$
A)Alpha Company
B)Beta Company
C)Gamma Company
D)They all have same operating leverage

Question

Based on the income statements of the three following retail businesses, which company has the highest operating leverage? $$\begin{array} { | l | r | r | r | } 
\hline & { \text { Alpha Company } } &  { \text { Beta Company } } & \text { Gamma Company } \
\hline \text { Revenue } & \$ 200,000 & \$ 200,000 & \$ 200,000 \
\hline \text { Variable costs } & ( 95,000 ) & ( 155,000 ) & ( 125,000 ) \
\hline \text { Contribution margin } & \$ 105,000 & \$ 45,000 & \$ 75,000 \
\hline \text { Fixed costs } & ( 80,000 ) & ( 20,000 ) & ( 50,000 ) \
\hline \text { Net income } & \$ 25,000 & \$ 25,000 & \$ 25,000 \
\hline
\end{array}$$
A)Alpha Company
B)Beta Company
C)Gamma Company
D)They all have same operating leverage

Quizplus · Accepted Answer

Operating leverage is higher when a company has a higher proportion of fixed costs relative to variable costs. Alpha Company has the highest fixed costs ($80,000) and the highest contribution margin ($105,000), indicating it has the highest operating leverage.

Based on the Income Statements of the Three Following Retail