Based on the income statements shown below, which division has the cost structure with the highest operating leverage? $$\begin{array} { | l | c | c | c | }
\hline & \text { Soft Drinks } & \text { Bottled Water } & \text { Fruit Juices } \
\hline \text { Revenue } & \$ 50,000 & \$ 50,000 & \$ 50,000 \
\hline \text { Variable costs } & ( 10,000 ) & ( 5000 ) & ( 30,000 ) \
\hline \text { Contribution margin } & 40,000 & 45,000 & 20,000 \
\hline \text { Fixed costs } & ( 30,000 ) & ( 40,000 ) & ( 10,000 ) \
\hline \text { Net income } & \$ 10,000 & \$ 5,000 & \$ 10,000 \
\hline
\end{array}$$
A) Bottled Water.
B) Fruit Juices.
C) Soft Drinks.
D) The three divisions have identical operating leverage.

Question

Based on the income statements shown below, which division has the cost structure with the highest operating leverage? $$\begin{array} { | l | c | c | c | } 
\hline & \text { Soft Drinks } & \text { Bottled Water } & \text { Fruit Juices } \
\hline \text { Revenue } & \$ 50,000 & \$ 50,000 & \$ 50,000 \
\hline \text { Variable costs } & ( 10,000 ) & ( 5000 ) & ( 30,000 ) \
\hline \text { Contribution margin } & 40,000 & 45,000 & 20,000 \
\hline \text { Fixed costs } & ( 30,000 ) & ( 40,000 ) & ( 10,000 ) \
\hline \text { Net income } & \$ 10,000 & \$ 5,000 & \$ 10,000 \
\hline
\end{array}$$
A) Bottled Water.
B) Fruit Juices.
C) Soft Drinks.
D) The three divisions have identical operating leverage.

Quizplus · Accepted Answer

Operating leverage is higher when a company has a larger proportion of fixed costs relative to variable costs. Bottled Water has the highest fixed costs ($40,000) and the lowest variable costs ($5,000), indicating the highest operating leverage.

Based on the Income Statements Shown Below, Which Division Has