Question

What is the degree of operating leverage (DOL) for Atech and Ztech, given Atech's fixed costs of $15 million and profits of $10 million, and Ztech's fixed costs of $16 million and profits of $10 million?

a. Atech: 1.5, Ztech: 1.6
b. Atech: 0.67, Ztech: 0.625
c. Atech: 1.5, Ztech: 0.625
d. Atech: 0.67, Ztech: 1.6

Answer 1

The degree of operating leverage (DOL) for both Atech and Ztech is undefined.

Step-by-step explanation:

The degree of operating leverage (DOL) measures the sensitivity of a company's operating income or profits to changes in its sales revenue. It is calculated by dividing the percentage change in operating income by the percentage change in sales revenue.

For Atech, we can calculate the DOL as follows:

1. Operating income for Atech = Profits - Fixed costs = $10 million - $15 million = -$5 million
2. Percentage change in operating income = -$5 million / $10 million = -0.5
3. Percentage change in sales revenue = 0 (since no change in sales revenue)
4. DOL for Atech = -0.5 / 0 = undefined

For Ztech, we can calculate the DOL as follows:

1. Operating income for Ztech = Profits - Fixed costs = $10 million - $16 million = -$6 million
2. Percentage change in operating income = -$6 million / $10 million = -0.6
3. Percentage change in sales revenue = 0 (since no change in sales revenue)
4. DOL for Ztech = -0.6 / 0 = undefined

Therefore, the correct answer is that the DOL for both Atech and Ztech is undefined.