Question

A firm that has total fixed costs of $40,000 sells its output for $250 per unit and has an average variable cost of $150. If the firm's cost and revenue curves are linear and output is equal to 500 units, what is the firm's degree of operating leverage?

A. 5
B. 4
C. 3
D. None of the above is correct.

Answer 1

option (A) 5

Step-by-step explanation:

Data provided in the question:

Total fixed cost = $40,000

Selling price = $250 per unit

Average variable cost = $150

Output = 500 units

Now,

Firm's degree of operating leverage

= {output × ( Selling price - Variable cost )} ÷ {output × ( Selling price - Variable cost )-Total fixed cost}

on substituting the respective values, we get

=
`(500*( 250 - 150 ))/(500*(250 - 150 ) - 40,000)`

= 50,000 ÷ [ 50,000 - 40,000 ]

= 50,000 ÷ 10,000

= 5

Hence,

The correct answer is option (A) 5