Business Applications  Operating leverage:Description of business for Caterpillar, Inc.

With 2014 sales and revenues of $55.184 billion,Caterpillar is the world’s leading manufacturer ofconstruction and mining equipment, diesel and natural gas engines,industrial gas turbines and diesel-electric locomotives. Thecompany principally operates through its three productsegments—Resource Industries, Construction Industries, and Energy& Transportation (formerly Power Systems)—and also providesfinancing and related services through its Financial Productssegment. Caterpillar is also a leading U.S. exporter.

Description of business for the Kroger Company from its Form10-K:

The Kroger Co. wasfounded in 1883 and incorporated in 1902. As of January 31, 2015,we are one of the largest retailers in the nation based on annualsales. . . .

As of January 31, 2015, Kroger operated, either directly orthrough its subsidiaries, 2,625 supermarkets and multi-departmentstores, 1,330 of which had fuel centers. Approximately 48% of thesesupermarkets were operated in Company-owned facilities, includingsome Company-owned buildings on leased land. Our current strategyemphasizes self-development and ownership of store real estate. Ourstores operate under several banners that have strong local tiesand brand recognition. Supermarkets are generally operated underone of the following formats: combination food and drug stores(“combo stores”); multi-department stores; marketplace stores; orprice impact warehouses.

Required

1. Determine which company appears to have the higheroperating leverage.
2. Write a paragraph or two explaining why the company youidentified in Requirement a might be expected to have thehigher operating leverage.
3. If revenues for both companies increased by 5 percent, whichcompany do you think would likely experience the greater percentageincrease in operating earnings? Explain your answer