The concept here is how responsive operating profit is to changes in sales, measured by the degree of operating leverage (DOL). DOL compares the contribution available to cover fixed costs and profit with the actual profit. It is calculated as Contribution Margin divided by Profit, where Contribution Margin equals Sales minus Variable Costs. Compute the contribution margin: 19,442 minus 13,730 equals 5,712. Then the DOL is 5,712 divided by 2,579, which is about 2.21. This tells you that, all else equal, a 1% change in sales would change operating profit by roughly 2.21%.

Cash flows are grouped into operating, investing, and financing activities. Investing activities show cash used for acquiring or disposing of long-term assets. The purchase of fixed assets is the classic investing outflow because it involves cash tied up in property, plant, and equipment to support future operations. The other items belong to different categories: issuing new debt is a financing activity that increases cash from financing; paying dividends is a financing outflow; interest income is typically reported in operating activities (though some frameworks classify interest differently). So the item that best represents an investing cash outflow is the purchase of fixed assets.

Non-operating items in other income and expense can be highly irregular, so the right approach is to separate what is likely to recur from what is not. When projecting the income statement, you should look at the amount and its repeatability. If there’s no evidence that the item will continue, set it to zero. If there is a history showing it repeats, include that amount as a recurring item but only to the extent it has proven to recur. This keeps the forecast focused on ongoing performance and avoids overstating profits with irregular gains or losses. Excluding it entirely would ignore the possibility of recurring non-operating effects, while automatically doubling for conservatism isn’t a standard practice for this line item.

Common sizing standardizes financial data so each line item is shown as a percentage of a single base. For the balance sheet, that base is total assets, so every balance sheet item—assets, liabilities, and equity—is expressed as a percentage of total assets. This lets you compare the composition of resources and obligations across firms and over time regardless of size. In contrast, income statement items are typically expressed as a percentage of sales to show profitability structure, and cash flow items are analyzed in absolute terms or as metrics tied to revenue or assets rather than a uniform percentage of total assets. Therefore, the items typically expressed as a percentage of total assets are balance sheet items.