Question

You estimate that your soy farm will generate 0.8 million of profits on sales of 8 million under normal economic conditions. If sales turn out to by 8.3 million, profits are expected to be 1 million. What is the degree of operating leverage?

Answer 1

The degree of operating leverage (DOL) measures the sensitivity of a company's profits to changes in sales volume. In this case, the DOL is 6.67.

Step-by-step explanation:

The degree of operating leverage (DOL) measures the sensitivity of a company's profits to changes in sales volume. To calculate the DOL, divide the percentage change in profits by the percentage change in sales. In this case, we can use the given information:

Under normal economic conditions:

Profits = $0.8 million

Sales = $8 million

If sales increase to $8.3 million:

Profits = $1 million

Using these values, the percentage change in profits is:

(1 million - 0.8 million) / 0.8 million = 0.25

The percentage change in sales is:

(8.3 million - 8 million) / 8 million = 0.0375

Now, we can calculate the degree of operating leverage:

DOL = 0.25 / 0.0375 = 6.67