Bob\'s Baked goods co reported following income statement..... If sales next yea
ID: 2668328 • Letter: B
Question
Bob's Baked goods co reported following income statement.....If sales next year increase by 20%, Bob's EBIT will increase:
c. over 35%, due to operating leverage
d. over 35%, due to operating leverage and financial leverage.
I know how to calculate...and I am only submitting the two answers I cant choose between. There are fixed as well as variable costs...but I am not sure if the fixed costs are from financing, or from overhead, which leaves me puzzled as to the answer. I know operating leverage is for sure the right answer and the % is figured correctly, but every time I think i get something..I seem to miss something else. LOL
Explanation / Answer
Answer is D. Operating leverage is how you can minimize the percentage that fixed costs make up (basically through larger volumes of operation), while financial leverage is how much debt and equity financing you can acquire while minimizing the necessity of using one's own cash reserves. If you're confident with the number %, the answer is D.