2-You estimate that your cattle farm will generate $0.20 million of profits on sales of $4...

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2-You estimate that your cattle farm will generate $0.20 million of profits on sales of $4...

2-You estimate that your cattle farm will generate $0.20 million of profits on sales of $4 million under normal economic conditions and that the degree of operating leverage is 5.

a. What will profits be if sales turn out to be $3.2 million?

b. b. What will profits be if sales turn out to be $4.8 million?

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Answer 1

Answer #1

a)
DOL = Percentage change in profit / Percentage change in sales

Percentage change in sales = ($3.2 m – $4 m) / $4 m = -20%

Percentage Change in profit = Percentage change in sales * DOL

Percentage Change in profit = -20% * 5

Percentage Change in profit = -100%

New Profit = Old Profit * (1 + % Change in profit)

New Profit = $0.20 m * (1 + (-1))

New Profit = 0

b)

DOL = Percentage change in profit / Percentage change in sales

Percentage change in sales = ($4.8 m – 4 m) / 4m = 20%

Percentage Change in profit = Percentage change in sales * DOL

Percentage Change in profit = 20% * 5

Percentage Change in profit = 100%

New Profit = Old Profit * (1 + % Change in profit)

New Profit = $0.20 m * (1 + 1)

New Profit = $0.40 million

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Answer 2

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