Final answer:
The degree of operating leverage measures the sensitivity of a company's operating income to changes in its sales volume. It can be calculated by dividing the percentage change in operating income by the percentage change in sales. In this case, the degree of operating leverage is infinity.
Step-by-step explanation:
The degree of operating leverage measures the sensitivity of a company's operating income to changes in its sales volume. It can be calculated by dividing the percentage change in operating income by the percentage change in sales. In this case, we can find the degree of operating leverage using the given information:
Total fixed costs = Initial fixed asset investment + Fixed costs = $420,000 + $180,000 = $600,000
List price per unit = $25, Variable costs per unit = $16, Quantity sold = 75,000 units
Total revenue = List price per unit x Quantity sold = $25 x 75,000 = $1,875,000
Total variable costs = Variable costs per unit x Quantity sold = $16 x 75,000 = $1,200,000
Operating income = Total revenue - Total variable costs - Total fixed costs = $1,875,000 - $1,200,000 - $600,000 = $75,000
Now, let's calculate the degree of operating leverage:
Percentage change in operating income = Operating income / Operating income at T = $75,000 / 0.34 = $220,588.24
Percentage change in sales = (Total revenue at T - Total revenue at T-1) / Total revenue at T-1
= ($1,875,000 - $1,875,000) / $1,875,000 = 0
Therefore, the degree of operating leverage is $220,588.24/0 = infinity (rounded to two decimal places).