Question

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Explanation:

Calculate operating leverage for both companies

Using the formula for the degree of operating leverage:

$$ \text{Operating Leverage} = \frac{\text{Contribution Margin}}{\text{Operating Income}} $$

For Asha Inc.:

$$ \text{Operating Leverage}_{\text{Asha}} = \frac{\$1,000,000}{\$200,000} = 5.0 $$

For Samir Inc.:

$$ \text{Operating Leverage}_{\text{Samir}} = \frac{\$1,500,000}{\$600,000} = 2.5 $$

Calculate operating income increase in percentage and dollars

The percentage increase in operating income is:

$$ \text{Percentage Increase} = \text{Operating Leverage} \times \text{Sales Increase \%} $$

For Asha Inc.:

$$
LATEXBLOCK0
$$

For Samir Inc.:

$$
LATEXBLOCK1
$$

Analyze the conceptual differences

• The difference in the sensitivity (or percentage increase) of operating income is due to the difference in operating leverages.
• Asha Inc.'s higher operating leverage means that its fixed costs are a larger percentage of contribution margin than are Samir Inc.'s.

Answer:

Question a

Asha Inc.: <blank>5.0</blank>
Samir Inc.: <blank>2.5</blank>

Question b

Asha Inc. Dollars: <blank>\$300,000</blank>
Asha Inc. Percentage: <blank>150</blank>%
Samir Inc. Dollars: <blank>\$450,000</blank>
Samir Inc. Percentage: <blank>75</blank>%

Question c

The difference in the <blank>sensitivity</blank> of operating income is due to the difference in the operating leverages. Asha Inc.'s <blank>higher</blank> operating leverage means that its fixed costs are a <blank>larger</blank> percentage of contribution margin than are Samir Inc.'s.