Question:
Picassos Pantry is a chain of arts and crafts stores. Results for the most recent year are as follows:
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Sales
|
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$9,000,000
|
|
Variable expenses
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$5,000,000
|
7,000,000
|
|
Fixed expenses
|
2,000,000
|
$2,000,000
|
|
Total expenses Operating income
|
|
|
Required
1. What is Picasso"s Pantry"s degree of operating leverage?
2. If sales increase by 5%, what will the new operating income be?
3. Managers are considering changing Picasso"s cost structure by offering employees a commission on sales rather than a fixed salary. What effect would such a change have on the firm"s operating leverage?