Modern Artifacts can produce keepsakes that will be sold for $120 each. Nondepre

Question

Modern Artifacts can produce keepsakes that will be sold for $120 each. Nondepreciation fixed costs are $1,600 per year, and variable costs are $100 per unit. The initial investment of $4,800 will be depreciated straight-line over its useful life of 6 years to a final value of zero, and the discount rate is 20%.

a. What is the degree of operating leverage of Modern Artifacts when sales are $15,000? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

b. What is the degree of operating leverage when sales are $28,080? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

Please specify answers to a and b. Thanks

Explanation / Answer

The operating leverage is defined as = (Sales - Variable costs) / (Sales - Variable Costs - Fixed Costs)

a.When there is a total sales is of 15,000, It means thata there are 15000/120 = 125 Units sold

Hence Variables costs are 125*100 =12500 and fixed costs are 1600

Hence operating leverage = (15000-12500)/(15000-12500-1600) = 2500/900 = 2.78

b. When the total sales is of 28,080, It means thata there are 28080/120 = 234 Units sold

Hence Variables costs are 234*100 =23400 and fixed costs are 1600

Hence operating leverage = (28080-23400)/(28080-23400-1600) = 4680/3080 = 1.52

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