Problem 5-15 Use of different formulas for operating leverage [LO3] U.S. Steal h

Question

Problem 5-15 Use of different formulas for operating leverage [LO3]
U.S. Steal has the following income statement data:

Units
sold
Total
variable
costs Fixed
costs Total
costs Total
revenue Operating
income
(Loss)
45,000 $ 135,000 $ 50,000 $ 185,000 $ 270,000 $ 85,000
65,000 195,000 50,000 245,000 390,000 145,000

(a)

Compute DOL based on the formula below. (Round your intermediate calculations to the nearest whole number and final answer to 2 decimal places.)

DOL =

Percent change in operating income
Percent change in units sold

Degree of operating leverage

(b)

Recompute DOL using the formula given below. There may be a slight difference due to rounding. (Round your answer to 2 decimal places.)

DOL =

Q(P ? VC)
Q(P ? VC) ? FC

Q represents beginning units sold (all calculations should be done at this level).
P can be found by dividing total revenue by units sold.
VC can be found by dividing total variable costs by units sold.

Degree of operating leverage

Explanation / Answer

a)DOL =Percent change in operating income/Percent change in units sold DOL =(145,000-85,000/85,000)/((65,000-45,000)/45,000) =1.588˜1.59 b)DOL=Q(P-CV)/[Q(P-VC)-FC] Q=45,000 P=total revenue/units sold =$2,70,000/45,000 =$6 VC =total variable cost/units sold =$135,000/45,000 =$3 FC=$50,000 DOL=45,000(6-3)/[45,000(6-3)-50,000] =1.59

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