Operating leverage The following information was taken from the Form 10-K SEC filings for CSX Cor 1 answer below »

Operating leverage The following information was taken from the Form 10-K SEC filings for CSX Corporation and Starbucks Corporation. It is from the 2004 fiscal year reports, and all dollar amounts are in millions. Description of Business for CSX Corporation CSX Corporation (CSX or the Company), operates one of the largest rail networks in the United States and also provides intermodal transportation services across the United States and key markets in Canada and Mexico. Its marine operations include an international terminal services company and a domestic container-shipping company.

CSX Corporation

2004

2003

Operating revenues

$8,020

$7,566

Operating earnings

418

137

Description of Business for Starbucks Corporation

Starbucks Corporation (together with its subsidiaries, Starbucks or the Company) purchases and roasts high-quality whole bean coffees and sells them, along with fresh, rich-brewed coffees, Italian-style espresso beverages, cold blended beverages, a variety of pastries and confections, coffee-related accessories and equipment, a selection of premium teas, and a line of compact discs primarily through Company-operated retail stores. At fiscal year-end, Starbucks had 4,095 Company-operated stores in the United States and Canada as well as 373 stores in the United Kingdom, 40 stores in Australia, and 38 stores in Thailand.

Starbucks

2004

2003

Operating revenues

$5,294

$4,076

Operating earnings

392

268

 

 

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.

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

 

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