Cain Company and Abel Corporation Have the Following Income Statements

question 69

Multiple Choice

Cain Company and Abel Corporation have the following income statements for the current year: $$\begin{array} { l r r } & \text { Cain Company } & \text { Abel Corporation } \\\hline \text { Sales } & \$ 50,000 & \$ 50,000 \\\text { Variable expenses } & 10,000 & 25,000 \\\text { Contribution margin } & \$ 40,000 & \$ 25,000 \\\text { Fixed expenses } & 25,000 & 10,000 \\\text { Operating income } & \$ 15,000 & \$ 15,000\end{array}$$ What is the degree of operating leverage for Cain Company for the current year?

• A)2.667
• B)0.375
• C)1.667
• D)1.250

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Definitions:

Accounts Receivable

The money owed to a business by its customers for goods or services that have been delivered but not yet paid for.

Step-Variable Cost

Costs that are fixed over a small range of activity but can change with significant changes in the volume of activity.

Sunk Cost

Expenses already incurred and which cannot be recovered, and should not be considered when making future business decisions.

Direct Manufacturing Cost

The sum of all costs directly tied to the production process, including direct labor and raw materials.