Modern Artifacts can produce keepsakes that will be sold for $80 each. Nondeprec
ID: 2643780 • Letter: M
Question
Modern Artifacts can produce keepsakes that will be sold for $80 each. Nondepreciation fixed costs are $1,000 per year, and variable costs are $60 per unit. The initial investment of $3,000 will be depreciated straight-line over its useful life of 5 years to a final value of zero, and the discount rate is 10%.
What is the degree of operating leverage of Modern Artifacts when sales are $7,000? (Do not round intermediate calculations. Round your answer to 2 decimal places.)
What is the degree of operating leverage when sales are $12,000? (Do not round intermediate calculations. Round your answer to 2 decimal places.)
Modern Artifacts can produce keepsakes that will be sold for $80 each. Nondepreciation fixed costs are $1,000 per year, and variable costs are $60 per unit. The initial investment of $3,000 will be depreciated straight-line over its useful life of 5 years to a final value of zero, and the discount rate is 10%.
Explanation / Answer
Formula:
Degree of Operating Leverage(DOL) = Contribution Margin/Operating Income
DOL = (Sales Revenue - Variable Costs) / (Sales Revenue - Variable Costs - Fixed Costs)
Solution:
a. Units Sold = Sales/ Price per unit
= $7,000/ $80 = 87.5 units
Variable Cost = $60 per unit * 87.5units = $5,250
Degree of Operating Leverage(DOL) = (7,000-5,250) / (7,000-5,250-1,000)
= 1,750 / 750 = 2.33
Degree of Operating Leverage(DOL) = 2.33
b. Units Sold = Sales/ Price per unit
= $12,000/ $80 = 150 units
Variable Cost = $60 per unit * 150units = $9,000
Degree of Operating Leverage(DOL) = (12,000-9,000) / (12,000-9,000-1,000)
= 3,000 / 1,000 = 1.5
Degree of Operating Leverage(DOL) = 1.5
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