You estimate that your cattle farm will generate $.15 million of profits on sale

Question

You estimate that your cattle farm will generate $.15 million of profits on sales of $3 million under normal economic conditions and that the degree of operating leverage is 2. (Leave no cells blank - be certain to enter "0" wherever required. Do not round intermediate calculations. Enter your answers in millions rounded to 1 decimal place.)

a. What will profits be if sales turn out to be $1.5 million?

Profit will increase or decrease to $      million.

b. What if they are $4.5 million?

Profit will increase or decrease to $      million.

Explanation / Answer

when sales are $ 3,000,0000 the profit is $ 150,000

when sales are $ 1500,000 the proft is $ 75,000

when sales are $ 4,500,000 the profit is $ 225,000

Degree of operating leverage when the operating income changes from $ 150,000 to $ 75,000 and sales $ 3000,000 to 1,500,000

Degree of operating leverage= change in income/ change in sales

75000/1500,000=0.05

when change in sales is $ 4500,000 change in income 225000

225000/4500000=0.05

so a) profit will decrease to $. 075m

b) proft will increase to $ .225m

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