Chapter 2: 15BP_b (page 149)

U.S. Steal has the following income statement data:
Units sold
Total variable costs
Fixed costs
Total costs
Total revenue
Operating income (Loss)
60,000
$120,000
$50,000
$170,000
$360,000
$190,000
80,000
160,000
50,000
210,000
480,000
270,000
b. Confirm that your answer to part a is correct by recomputing DOL using Formula 5-3. There may be a slight difference due to rounding.
$DOL = \frac{Q (P - VC)}{Q (P - VC) - FC}$
Q represents beginning units sold (all calculations should be done at this level). P can be found by dividing total revenue by units sold. VC can be found by dividing total variable costs by units sold.

Short Answer

Expert verified

The degree of operating leverage of the company is 1.26. It is confirmed that the DOL computed in part a is correct.

Step by step solution

Calculating the amount of P at 60,000 units sold

$\begin{array}{rcl} P & = & \frac{Total revenue at 60, 000 units}{Number of units} \\ = & \frac{$ 360, 000}{60, 000} \\ = & $ 6 \end{array}$

Calculate VC

$\begin{array}{rcl} VC & = & \frac{Total variable cost}{Number of units sold} \\ = & \frac{$ 120, 000}{60, 000} \\ = & 2 \end{array}$

Degree of operating leverage

$\begin{array}{rcl} DOL & = & \frac{Q (P - VC)}{(P - VC) - FC} \\ = & \frac{60, 000 ($ 6 - $ 2)}{60, 000 ($ 6 - $ 2) - $ 50, 000} \\ = & 1.26 \end{array}$

The degree of operating leverage by applying the given formula in question is 1.26.

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Selling and administrative expenses	$112,000
Depreciation expenses	73,000
Sales	489,000
Interest expenses	45,000
Cost of goods sold	156,000
Taxes	47,000

Retained earning	Bond payable
Accounts payable	Accrued wages payable
Prepaid expenses	Accounts receivable
Plant and equipment	Capital in excess of par
Inventory	Preferred stock
Common stock	Marketable security

Short Answer

Step by step solution

Calculating the amount of P at 60,000 units sold

Calculate VC

Degree of operating leverage

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Units sold	Total variable costs	Fixed costs	Total costs	Total revenue	Operating income (Loss)
60,000	\(120,000	\)50,000	\(170,000	\)360,000	$190,000
80,000	160,000	50,000	210,000	480,000	270,000