Based on the Income Statements of the Three Following Retail

question 36

Multiple Choice

Based on the income statements of the three following retail businesses, which company has the highest operating leverage? $\begin{array}{|l|r|r|r|}\hline & \text { Alpha Company } & \text { Beta Company } & \text { Gamma Company } \\\hline \text { Revenue } & \$ 200,000 & \$ 200,000 & \$ 200,000 \\\hline \text { Variable costs } & (95,000) & (155,000) & (125,000) \\\hline \text { Contribution margin } & \$ 105,000 & \$ 45,000 & \$ 75,000 \\\hline \text { Fixed costs } & (80,000) & (20,000) & (50,000) \\\hline \text { Net income } & \$ 25,000 & \$ 25,000 & \$ 25,000 \\\hline\end{array}$

• A) Alpha Company
• B) Beta Company
• C) Gamma Company
• D) They all have same operating leverage

---

Definitions:

Conditional Probability

The probability of one event occurring with some relationship to one or more other events.

Real Option

A choice available to companies involving business decisions on investments, which use the concept of option valuation in financial markets.

Scenario Analysis

A process of analyzing future events by considering alternative possible outcomes (scenarios), often used in the assessment of risk or strategic planning.

NPV

Net Present Value, a calculation used to estimate the profitability of an investment or project by summing the present values of all expected future cash flows.