Clinton Co.has an operating leverage of 4.Sales are expected to increase by 8% next year.Operating income is:
A) unaffected.
B) expected to increase by 2%.
C) expected to increase by 32%.
D) expected to increase by 4 times.

Question

Quizplus · Accepted Answer

Operating leverage (OL) = % change in operating income / % change in sales

OL = 4

% change in sales = 8%

Using the formula for OL, we can calculate the expected % change in operating income:

4 = x / 8

x = 32%

Therefore, the expected increase in operating income is 32%.