Bendel Incorporated has an operating leverage of 7.3. If the company's salesvolume increases by 3%, its net operating income should increase by about:

A) 243.3%
B) 7.3%
C) 21.9%
D) 3.0%

Question

Bendel Incorporated has an operating leverage of 7.3. If the company's salesvolume increases by 3%, its net operating income should increase by about:A)  243.3%B)  7.3%C)  21.9%D)  3.0%

JUSTIN BRITTON · Accepted Answer

Final Answer : C, Explanation :  Operating leverage is a ratio of fixed costs to total costs. Mathematically, operating leverage = contribution margin/net operating income.Given operating leverage = 7.3, it means contribution margin constitutes a larger proportion of total costs as compared to fixed costs.If sales volume increases by 3%, the contribution margin would increase by 3% as well (assuming no change in selling price or variable cost per unit). Since operating leverage is high, this increase in contribution margin will lead to a proportionately higher increase in net operating income.Mathematically, the percentage increase in net operating income = operating leverage x percentage increase in sales volume.Therefore, the percentage increase in net operating income = 7.3 x 3% = 21.9%.Hence, the correct answer is C) 21.9%.

Bendel Incorporated has an operating leverage of 7.3. If the company's salesvolume increases by 3%, its net operating income should increase by about:

A) 243.3%
B) 7.3%
C) 21.9%
D) 3.0%

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