Question

U.S. Steal has the following income statement data Total Variable Costs $ 90,000 150,000 Operating Income (Loss) $ 120,000 220,000 Units Sold 30,000 50,000 Fixed Costs $ 30,000 30,000 Total Costs $ 120,000 180,000 Total Revenue $ 240,000 400,000 The top row of the table has the beginning values and the bottom row of the table has the ending values. a. Compute the degree of operating leverage (DOL) based on the formula below (Do not round intermediate calculátions. Round your final answer to 2 decimal places.) Percent change in operating income Percent change in units sold DOL Degree of operating leverage

Answer 1

Answer to Part a.

Percent change in Operating Income = ($220,000 - $120,000) / $120,000 * 100
Percent change in Operating Income = 83.33%

Percent change in units sold = (50,000 – 30,000) / 30,000 * 100
Percent change in units sold = 66.67%

Degree of Operating Leverage (DOL) = 0.8333 / 0.6667
Degree of Operating Leverage (DOL) = 1.25

Answer to Part b.

DOL = Q (P – VC) / Q (P – VC) – FC

Q = 30,000 Units

P = Total Revenue / Units Sold
P = $240,000 / 30,000
P = $8

VC = Total Variable Cost / Units Sold
VC = $90,000 / 30,000
VC = $3

FC = $30,000

DOL = 30,000 * ($8 - $3) / 30,000 * ($8 - $3) - $30,000
DOL = 150,000 / 150,000 – 30,000
DOL = 150,000 / 120,000
DOL = 1.25