Tyson Company has an operating leverage factor of 5. Which of the following statements is true?

• A. A 1% increase in sales will result in a 5% increase in operating income.
• B. A 1% increase in sales will result in a 1% increase in operating income.
• C. A 5% increase in sales will result in a 1% increase in operating income.
• D. Operating leverage has no effect on the relationship between sales and operating income.

Answer: (A)

Verified step by step guidance

1. Understand the concept of operating leverage: Operating leverage measures how sensitive a company's operating income is to changes in sales. It is calculated as the ratio of contribution margin to operating income. A higher operating leverage factor indicates that a small change in sales can lead to a larger change in operating income.
2. Interpret the operating leverage factor: Tyson Company has an operating leverage factor of 5. This means that for every 1% change in sales, operating income will change by 5%. The operating leverage factor amplifies the effect of sales changes on operating income.
3. Analyze the given statements: Evaluate each statement based on the operating leverage factor of 5. For example, the first statement, 'A 1% increase in sales will result in a 5% increase in operating income,' aligns with the definition of operating leverage.
4. Eliminate incorrect options: The second statement, 'A 1% increase in sales will result in a 1% increase in operating income,' is incorrect because it does not account for the operating leverage factor. Similarly, the third and fourth statements are inconsistent with the concept of operating leverage.
5. Select the correct answer: Based on the analysis, the correct statement is 'A 1% increase in sales will result in a 5% increase in operating income,' as it accurately reflects the relationship between sales and operating income given the operating leverage factor of 5.