Degree of Operating Leverage
Exercise 9-32 (Static) Degree of Operating Leverage (DOL) [LO 9-5]
TastyKreme and Krispy Kake are both producers of baked goods, but each has followed a different production strategy. The differences in their strategies resulted in differences in their cost structure, as shown in the following table:
| TastyKreme | Krispy Kake | |
|---|---|---|
| Estimated sales in units | 20,000 | 15,000 |
| Unit price | 6.00 | 8.00 |
| Variable cost per unit | 3.00 | 3.00 |
| Total fixed costs | $ 30,000 | $ 45,000 |
Required:
1. Compute the operating income and degree of operating leverage for each company. (Round "Degree of operating leverage" to 1 decimal place.)
2. Assuming sales volume for each company will decline by 10% and that their cost structures will not change, compute the percentage and dollar amount of the change in operating income for each company. (Negative values should be indicated by a minus sign.)
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Exercise 9-32 Degree of Operating Leverage (DOL) (LO 9-5] Tasty Kreme and Krispy Kake are both...
Exercise 9-32 Degree of Operating Leverage (DOL) (LO 9-5] Tasty Kreme and Krispy Kake are both producers of baked goods, but each has followed a different production strategy. The differences in their strategies resulted in differences in their cost structure, as shown in the following table: Estimated sales in units Unit price Variable cost per unit Total fixed costs TastyKreme Krispy Kake 28,000 27,000 8 8 5 $ 42,000 $81,000 3 Required: 1. Compute the operating income and degree of...
a) Degree of operating leverage = Contribution margin / profit Degree of operating leverage = 15,600,000...
a) Degree of operating leverage = Contribution margin / profit Degree of operating leverage = 15,600,000 / 6,000,000 = 1.625 Sales = 1200000 x 24 = 28800000 Less: Variable cost = 1200000 x 11 = 13200000 Contribution Margin = 28800000 - 13200000 = 15,600,000 Less: Fixed cost = 9,600,000 Profit = 15600000-9600000 = 6000000 b) Break even units Contribution margin per unit = Selling price - variable cost = $24 - $11 = $13 Break even units = Fixed cost...
Degree of operating leverage—Graphical Levin Corporation has fixed operating costs of 580,000, variable operating costs of...
Degree of operating leverage—Graphical Levin Corporation has fixed operating costs of 580,000, variable operating costs of 96.60 per unit, and a selling price of 59.50 per unit a. Calculate the operating breakeven point in units. b. Compute the degree of operating leverage (DOL) using the following unit sales levels as a base: 27,667, 31.667, 39,667 Use the formula given in the chapter c. Graph the DOL figures that you computed in part (b) (on they axis) against base sales levels...
2. A review of the degree of operating leverage (DOL) It is December 31. Last year,...
2. A review of the degree of operating leverage (DOL) It is December 31. Last year, Western Gas & Electric Company (WGEC) had sales of $8,000,000, and it forecasts that next year's sales will be $8,560,000. Its fixed costs have been and are expected to continue to be $600,000, and its variable cost ratio is 55.00% WGEC's capital structure consists of a $13.5 million bank loan, on which it pays an interest rate of 6%, and 300,000 shares of common...
Saved Which of the following statements is true with respect to the degree of operating leverage...
Saved Which of the following statements is true with respect to the degree of operating leverage (DOL)? 8 Multiple Choice It is calculated as the ratio of contribution margin (CM) to operating Income, at each level of output For most firms, it is relatively constantin ount as sales volume changes. It provides a simple way to estimate the change in total fixed cost for a given change in sales volume. It is calculated as the amount of operating income where...
5. Given the following information, what is the degree of operating leverage? Sales: 100 Variable costs:...
5. Given the following information, what is the degree of operating leverage? Sales: 100 Variable costs: 20 Fixed costs:30 6. Given the info above, if sales change 20% how much will operating income change? 7. If the company has $900 in sales and $1,030 in sales in year 2, then operating income will change by what percentage if the DOL is 10?
Degree of operating leverage Grey Products has fixed operating costs of $389,000, variable operating costs of...
Degree of operating leverage Grey Products has fixed operating costs of $389,000, variable operating costs of $16.19 per unit, and a selling price of $63.43 per unit. a. Calculate the operating breakeven point in units. b. Calculate the firm's EBIT at 10,000, 12,000, and 14,000 units, respectively. c. With 12,000 units as a base, what are the percentage changes in units sold and EBIT as sales move from the base to the other sales levels used in part (b)? d....
Degree of operating leverage Grey Products has fixed operating costs of $373,000, variable operating costs of...
Degree of operating leverage Grey Products has fixed operating costs of $373,000, variable operating costs of $16.55 per unit, and a selling price of $63.45 per unit. a. Calculate the operating breakeven point in units. b. Calculate the firm's EBIT at 11,000, 13,000, and 15,000 units, respectively. c. With 13,000 units as a base, what are the percentage changes in units sold and EBIT as sales move from the base to the other sales levels used in part (b)? d....
Suppose that there are two firms operating in a market. Suppose that the degree of operating leverage...
Suppose that there are two firms operating in a market. Suppose that the degree of operating leverage for Firm 1 is DOL= 1.5 while the degree of operating leverage for Firm 2 is DOL=2 How much would the profits of each firm change if both firms experienced an increase in quantity sold of 10%? Suppose instead that each firm experiences a 5% decrease in quantity sold. What would happen to the profits of each firm? Which firm’s profits are more sensitive to...
Impact of Increased Sales on Operating Income Using the Degree of Operating Leverage Chillmax Company had...
Impact of Increased Sales on Operating Income Using the Degree of Operating Leverage Chillmax Company had planned to sell 3,500 pairs of shoes at $60 each in the coming year. Unit variable cost is $21 (includes direct materials, direct labor, variable factory overhead, and variable selling expense). Total fixed cost equals $78,000 (includes fixed factory overhead and fixed selling and administrative expense). Operating income at 3,500 units sold is $58,500. The degree of operating leverage is 2.3. Now Chillmax expects...
Exercise 9-32 Degree of Operating Leverage (DOL) (LO 9-5] Tasty Kreme and Krispy Kake are both producers of baked goods, but each has followed a different production strategy. The differences in their strategies resulted in differences in their cost structure, as shown in the following table: Estimated sales in units Unit price Variable cost per unit Total fixed costs TastyKreme Krispy Kake 28,000 27,000 8 8 5 $ 42,000 $81,000 3 Required: 1. Compute the operating income and degree of...
Degree of operating leverage—Graphical Levin Corporation has fixed operating costs of 580,000, variable operating costs of 96.60 per unit, and a selling price of 59.50 per unit a. Calculate the operating breakeven point in units. b. Compute the degree of operating leverage (DOL) using the following unit sales levels as a base: 27,667, 31.667, 39,667 Use the formula given in the chapter c. Graph the DOL figures that you computed in part (b) (on they axis) against base sales levels...
2. A review of the degree of operating leverage (DOL) It is December 31. Last year, Western Gas & Electric Company (WGEC) had sales of $8,000,000, and it forecasts that next year's sales will be $8,560,000. Its fixed costs have been and are expected to continue to be $600,000, and its variable cost ratio is 55.00% WGEC's capital structure consists of a $13.5 million bank loan, on which it pays an interest rate of 6%, and 300,000 shares of common...
Saved Which of the following statements is true with respect to the degree of operating leverage (DOL)? 8 Multiple Choice It is calculated as the ratio of contribution margin (CM) to operating Income, at each level of output For most firms, it is relatively constantin ount as sales volume changes. It provides a simple way to estimate the change in total fixed cost for a given change in sales volume. It is calculated as the amount of operating income where...
Degree of operating leverage Grey Products has fixed operating costs of $389,000, variable operating costs of $16.19 per unit, and a selling price of $63.43 per unit. a. Calculate the operating breakeven point in units. b. Calculate the firm's EBIT at 10,000, 12,000, and 14,000 units, respectively. c. With 12,000 units as a base, what are the percentage changes in units sold and EBIT as sales move from the base to the other sales levels used in part (b)? d....
Degree of operating leverage Grey Products has fixed operating costs of $373,000, variable operating costs of $16.55 per unit, and a selling price of $63.45 per unit. a. Calculate the operating breakeven point in units. b. Calculate the firm's EBIT at 11,000, 13,000, and 15,000 units, respectively. c. With 13,000 units as a base, what are the percentage changes in units sold and EBIT as sales move from the base to the other sales levels used in part (b)? d....
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