Question - The following information is available for the Blue and Red Companies for 2011
Blue Red
Sales (200,000 units) $1,800,000 $1,800,000
Variable costs 800,000 1,200,000
Contribution margin 1,000,000 600,000
Fixed costs 500,000 100,000
Net operating income $500,000 $500,000
1. Compute the operating leverage for each company and explain what operating leverage measures.
2. If both companies experience a 20% increase in sales volume, will they continue to have the same net operating income? Why or why not? Explain your answer with respect to each company's operating leverage.