You estimate that your cattle farm will generate $1 million of profits on sales of $5.7 million under normal economic conditions and that the degree of operating leverage is 8. a. What will profits be if sales turn out to be $5.0 million? (Negative amount should be indicated by a minus sign. Round your answer to 1 decimal place.) b. What if they are $6.4 million? (Round your answer to 1 decimal place.)
You estimate that your cattle farm will generate $1 million of profits on sales of $5.7 million under normal economic conditions and that the degree of operating leverage is 8.
a. What will profits be if sales turn out to be $5.0 million? (Negative amount should be indicated by a minus sign. Round your answer to 1 decimal place.)
b. What if they are $6.4 million? (Round your answer to 1 decimal place.)
Operating leverage refers to the rate at which sales are converted into operating income
Operating leverage = (% Change in profits/% Change in sales)
a)
% Change in sales
=( current sales - new sales)/current sales
= (5.7 -5)/5.7
= 12.2807%
% Change in Profit
= 8* 12.2807%
=98.2456%
So, Profits will fall by 0.982456 million
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