activity ratios.pptVIP

Contribution Margin Ratio = contribution sales =1- Variable costs sales Operating leverage effect (OLE): OLE= Contribution Margin Ratio Return on Sales contribution Operating Income = % Change in income = OLE×% Change in Sales Company F: OLE=60%/20%= 3 B: Assuming 50% Financing, Debt $100, Equity $100,Interest Rate 5% Scenario Financial Leverage Total Leverage Company V Company F A B C A B C Operating income 10 20 30 -10 20 50 Interest 5 5 5 5 5 5 Net income 5 15 25 -15 15 45 Return on assets 5% 10% 15% -5% 10% 25% on equity 5% 15% 25% -15% 15% 45% Financial Leverage: Scenario No Lev