Question

U.S. Steal has the following income statement data Units Sold 80,000 100,000 Total Variable Costs 160,000 200,000 Fixed Costs $ 70,000 70,000 perating Income (Loss) Total Costs Total Revenue $ 230,000 $ 400,000 $ 170,000 270,000 500,000 230,000 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 calculations. Round your final answer to 2 decimal places.) Percent change in operating income DOL - Percent change in units sold Degree of operating leverage 1.41 b. Recompute DOL using the formula given below. There may be a slight difference due to rounding. (Do not round intermediate calculations. Round your final answer to 2 decimal places.) P VC Q(P VC)- FC DOL - Q represents beginning units sold (all calculations should be done at this level) P can be found by dividing total revenue by units sold VC can be found by dividing total variable costs by units sold Degree of operating leverage

Answer 1

Ans.a	DOL = Percent change in operating income / Percent change in units sold
		0.3529 / 0.25
		1.41	(rounded)
	*Percent change in operating income =     (230000 -170000) / 170000
			60000 / 170000
			0.3529     or	35.29%
	*Percent change in units sold = (100000 - 80000) / 80000
		20000 / 80000
		0.25   or	25%
Ans.b	DOL = Q (P - VC) / [Q (P - VC) - FC]
	80000 * (5 - 2 ) / [80000 * (5 - 2) - 70000]
	80000 * 3 / [(80000 * 3) - 70000]
	240000 / [240000 - 70000]
	240000 / 170000
	1.41	(rounded)
	*Calculations:
	Q   =   80000 (given)
	P =   Total revenue / Units sold
	400000 / 80000     or     500000 / 100000
	$ 5 per unit
	VC = Total Variable cost / Units sold
	160000 / 80000 or 200000 / 100000
	$ 2 per unit