Merck & Co., Inc., is a global health care company that delivers innovative health solutions through its prescription medicines, vaccines, biologic therapies, animal health, and consumer care products, which it markets directly and through its joint ventures. The Company’s operations are principally managed on a products basis and are comprised of four operating segments, which are the Pharmaceutical, Animal Health, Consumer Care, and Alliances segments, and one reportable segment, which is the Pharmaceutical segment.
We at Costco Wholesale Corporation operate membership warehouses based on the concept that offering our members low prices on a limited selection of nationally branded and private-label products in a wide range of merchandise categories will produce high sales volumes and rapid inventory turnover. . . . Because of our high sales volume and rapid inventory turnover, we generally sell inventory before we are required to pay many of our merchandise vendors, even though we take advantage of early payment discounts when available. To the extent that sales increase and inventory turn-over becomes more rapid, a greater percentage of inventory is financed through payment terms provided by suppliers rather than by our working capital.
Required a. Determine which company appears to have the higher operating leverage. b. Write a paragraph or two explaining why the company you identified in Requirement a might be expected to have the higher operating leverage. c. If revenues for both companies declined, which company do you think would likely experience the greater decline in operating earnings? Explain youranswer.