These sales and cost data (000s) are for two companies in the transportation industry:

	Company A		Company B
	Amount	% of Sales	Amount	% of Sales
Sales	$100,000	100%	$100,000	100%
Variable costs	$60,000	60%	$30,000	30%
Contribution margin	$40,000	40%	$70,000	70%
Fixed Costs	$15,000		$40,000
Net income	$25,000		$30,000

Required
1. Calculate the operating leverage for each company. If sales increase, which company benefits more? How do you know?
2. Assume that sales rise 10 percent in the next year. Calculate the percentage increase in profit for each company. Are the results what youexpected?

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If sales increase, company B will benefit more. Company B has a higher proportion of fixed costs in relation to variable costs; therefore it has a higher operating leverage than does Company A. The degree of operating leverageis a measure, at a specific level of sales, of how a percentage changein sales volume will affect profits. The higher the oper ating leverage the more sensitive profits are to changes in sales volume.