(Answered) Question - the following information is available for the

Accounting

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.

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