Question

Modern artifacts produce keepsakes that will be sold for $120 each. Non-depreciation fixed costs are $1,800 per year, and variable costs are $70 per unit. Given the information, what is the degree of operating leverage of modern artifacts when sales are $7,440?

a) High
b) Low
c) Medium
d) Cannot be determined

Answer 1

The degree of operating leverage (DOL) for Modern Artifacts when sales are $7,440 is 2.38, calculated using the given fixed and variable costs. The DOL is not qualitatively described as high, low, or medium, nor undeterminable; it is specifically quantified.

Step-by-step explanation:

The degree of operating leverage (DOL) is a financial ratio that measures the sensitivity of a company's operating income to changes in sales. The degree of operating leverage can be calculated using the formula:

DOL = Quantity × (Sales Price - Variable Cost per Unit) / (Quantity × (Sales Price - Variable Cost per Unit) - Fixed Costs)

First, let's calculate the number of units sold by Modern Artifacts:

Sales = $7,440

Sales Price per Unit = $120

Units Sold = Sales / Sales Price per Unit

Units Sold = $7,440 / $120

Units Sold = 62 units

Now we can calculate the DOL:

Non-depreciation Fixed Costs = $1,800

Variable Cost per Unit = $70

DOL = 62 units × ($120 - $70) / [62 units × ($120 - $70) - $1,800]

DOL = 62 × $50 / (62 × $50 - $1,800)

DOL = $3,100 / ($3,100 - $1,800)

DOL = $3,100 / $1,300
DOL = 2.38

Because we have a Numerical value for DOL, the answer to the degree of operating leverage is neither high, low, medium, nor cannot be determined. Instead, the DOL has been calculated.