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    Costs and Operating Leverage

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    Two brothers (Barry and Larry) dreamt about owning and operating companies in the same line of business. Barry believed that maintaining a very large, highly efficient manual labor force; Larry, on the other hand, favored an automated production process.
    One business was located in Madison and the other was located in Austin. Recent data follow:

    Madison / Austin
    Sales: $2,000,000/ $2,000,000
    Contribution margin: 1,700,000 / 400,000
    Net Income: 150,000 / 150,000

    A. Which of the two businesses, Madison or Austin, has the highest level of (1) Variable cost (2) highest level of fixed cost. Explain how you determined your answer.
    B. Determine the probable owner of the firm in (1) Madison and (2) Austin. Briefly explain your logic.
    C. Compute the operating leverage factor for Madison and Austin.
    D. Suppose that both Madison and Austin had the opportunity to increase sales by 10%. Which of the two locations would experience a larger percentage change in net income? Why?

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    Solution Summary

    This response helps in the computation of costs and operating leverage. It is provided in a simplistic method in Excel.