Modern Artifacts can produce keepsakes that will be sold for $250 each. Nondepre

Question

Modern Artifacts can produce keepsakes that will be sold for $250 each. Nondepreciation fixed costs are $3,000 per year, and variable costs are $150 per unit. The initial investment of $9,000 will be depreciated straight-line over its useful life of 9 years to a final value of zero, and the discount rate is 16%.

A) What is the degree of operating leverage of Modern Artifacts when sales are $11,250? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

B) What is the degree of operating leverage when sales are $19,500? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

Explanation / Answer

A)      Degree of Operating Leverage = 1+(Fixed cost /Profit)

                                                       Profit = $11,250-6,750-4000 = $500

Now the Degree of Operating Leverage = 1+ ($4,000/$500)

                                                                          = 1+8 = 9

B) Degree of Operating Leverage = 1+(Fixed cost /Profit)

                                                Profit = 19,500-11700-4000 = 3800

Now the Degree of Operating Leverage = 1+ ($4,000/$ 3800)

= 1+ 1.052 = 2.052

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