Miller 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

The operating leverage factor measures the sensitivity of a company's operating income to changes in sales revenue. A high operating leverage factor indicates that a small change in sales revenue will have a significant effect on operating income. The formula for calculating the degree of operating leverage is as follows:

Degree of Operating Leverage = % Change in Operating Income / % Change in Sales Revenue

Given that Miller Company has an operating leverage factor of 5, this means that a 1% change in sales revenue will result in a 5% change in operating income. Therefore, an 8% change in sales revenue should result in a 40% change in operating income.

Since operating income is equal to sales revenue minus all costs (both fixed and variable), we can rule out choices C and E. Choice D is incorrect because a change in fixed costs would not affect the contribution margin, only changes in variable costs would. Therefore, the correct answer is choice B.

Miller Company Has an Operating Leverage Factor of 5