Question: Business Applications Operating leverage Description of Business for Merck & Co., Inc. Merck & Co., Inc., is a global health care company that delivers innovative health solutions through its prescription medicines, vaccines, biologic therapies, animal health , and consumer care products, which it markets directly and through its joint ventures. The Company's operations are principally managed on a products basis and are comprised of four operationg segments, which are the Pharmaceutical, Animal Health, COnsumer Care, and Alliances segments, and one reportable segment, which is the Pharmaceutical segment.

Merck & Company

2001

Revenue -$48,047

Operating Earnings- $7,334

2010

Revenue -$45,987

Operating Earnings- $1,653

Description of Business for Costco Wholesale Corporation

We at Costco Wholesale Corporation operate membership wharehouses based on the concept that offering our members low prices on a limited selection of nationally branded and private-label products in a wide range of merchandise categories will produce high sales volumes and rapid inventory turnover. Because of out ghe sales volume and rapid inventory turnover, we generally sell inventory before we are required to pay many of our merchandise vendors, even though we take advantage of early payment discounts when available. To the extent that sales increase and inventory turnover becomes more rapid, a greater percentage of inventoy is financed through payment terms provided by suppliers rather than by our working capital.

Costco Corporation

2001

Revenue -$88,915

Operating Earnings- $2,439

2010

Revenue -$77,946

Operating Earnings- $2,077

a. Determine which company appears to have the higher operating leverage.

b. Write a paragraph or two explaining why the company you identified in Requirement a might be expected to have the higher operating leverage.

c. If revenues for both companies declined, which company do you think would likely experimence the greater decline in operating earnings? Explain your answer.