Based on the income statements of the three following retail businesses, which company has the highest operating leverage?
A) Alpha Company
B) Beta Company
C) Gamma Company
D) They all have same operating leverage

Question

Based on the income statements of the three following retail businesses, which company has the highest operating leverage? 
A) Alpha Company 
B) Beta Company 
C) Gamma Company 
D) They all have same operating leverage

Quizplus · Accepted Answer

Given that all three companies have the same sales revenue and the same net income, the company with the greatest contribution margin will have the highest degree of operating leverage.
Alternatively, the answer can be obtained by calculating the degree of operating leverage for each company:
Magnitude of operating leverage = Contribution margin ÷ Net income
Alpha: Magnitude of operating leverage = $105,000 ÷ $25,000 = 4.2
Beta: Magnitude of operating leverage = $45,000 ÷ $25,000 = 1.8
Gamma: Magnitude of operating leverage = $75,000 ÷ $25,000 = 3.0

Based on the Income Statements of the Three Following Retail