Gandee Company has an operating leverage factor of 5. Which of the following statements is true?
Thus, an 8% change in ______ should result in a 40% change in ______. The respective amounts that change are:
A) An 8% change in income should result in a 40% change in sales revenue.
B) An 8% change in sales revenue should result in a 40% change in income.
C) An 8% change in variable costs should result in a 40% change in contribution margin.
D) An 8% change in fixed costs should result in a 40% change in income.
E) An 8% change in variable costs should result in a 40% change in break-even sales.

Question

Quizplus · Accepted Answer

Operating leverage measures the relationship between sales revenue and income (operating income or EBIT). A leverage factor of 5 means that a 1% change in sales revenue will result in a 5% change in income. Therefore, an 8% change in sales revenue should result in a 40% change in income.

Gandee Company Has an Operating Leverage Factor of 5