please Show Work and reasoning also Cost Behavior Operating

please Show Work and reasoning also.

Cost Behavior, Operating Leverage, and Pr are generally operated under one of the following formats: combination food and drug stores (\"combo stores\";: multi-department stores; marketplace stores; or price impact warehouses 2014 Kroger Co. Revenue Operating earnings 2013 $108,465 $98,375 3,137 2,725 Required 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. If revenues for both companies increased by 5 percent, which company do you think would likely experience the greater percentage increase in operating earnings? Explain your answer. c.

Solution

Part 1)

To determine which company appears to have higher operating leverage, we need to calculate percentage change in revenue and percentage change in income for both the companies as follows:

Percentage Change in Revenue (Caterpillar Inc.) = (Revenue for 2014 - Revenue for 2013)/Revenue for 2013*100 = (55,184 - 55,656)/55,656*100 = -.85%

Percentage in Operating Income (Caterpillar Inc.) = (Operating Income for 2014 - Operating Income for 2013)/Operating Income for 2013*100 = (5,328 - 5,628)/5,628*100 = -5.33%

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Percentage Change in Revenue (Kroger Co.) = (Revenue for 2014 - Revenue for 2013)/Revenue for 2013*100 = (104,865 - 98,375)/98,375*100 = 6.60%

Percentage in Operating Income (Kroger Co.) = (Operating Income for 2014 - Operating Income for 2013)/Operating Income for 2013*100 = (3,137 - 2,725)/2,725*100 = 15.11%

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Based on the above calculations it can be seen that the change in income relative to the change in revenue is higher for Caterpillar Inc. as compared to Kroger Co. Therefore, Caterpillar Inc.\'s operating leverage would be higher than that of Kroger Co.

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Part 2)

A logical explanation for higher operating leverage of Caterpillar Inc. would be inclusion/incurrence of more fixed costs (such as investments in fixed asset resulting in higher depreciation expense) in relation to sales. On the other hand, the operating leverage of Kroger Co. could be lower on account of higher cost of goods sold which is variable in nature.

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Part 3)

A company with a higher operating leverage is likely to experience more change in its operating earnings with change in its revenue. Therefore, Caterpillar Inc. is likely to experience a greater percentage increase in operating income if the revenues for both the companies increased by 5%.