Kahn Manufacturing’s degree of operating leverage is 1.5. Chegg Corporation’s de

Question

Kahn Manufacturing’s degree of operating leverage is 1.5. Chegg Corporation’s degree of operating leverage is 3. Chegg’s earnings would go up (or down) by [blank] as much as Kahn’s with an equal increase (or decrease) in sales. (Explain)
A. 2 times B. 1.5 times C. 1/2 D. 4.5 times Kahn Manufacturing’s degree of operating leverage is 1.5. Chegg Corporation’s degree of operating leverage is 3. Chegg’s earnings would go up (or down) by [blank] as much as Kahn’s with an equal increase (or decrease) in sales. (Explain)
A. 2 times B. 1.5 times C. 1/2 D. 4.5 times
A. 2 times B. 1.5 times C. 1/2 D. 4.5 times

Explanation / Answer

A. 2 times.

Suppose the equal increase ( decrease) in sales is 10 %.

Increase ( decrease) in earnings of Kahn Manufacturing is 1.5x 10 % = 15 %.

Increase ( decrease) in earnings of Chegg Corporation is 3 x 10 % = 30 %.

Therefore chegg's earnings would go up or down by 30% / 15 % = 2 times as much as that of Kahn Manufacturing.

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