Answer:
A) 11
Explanation:
The degree of operating leverage measures change in earning before interest and tax (EBIT) to change in sales.
Solution:
Formula
DOL = Percentage change in EBIT / Percentage change in sales
Percentage Change in EBIT = EBIT(1) / EBIT(2) - 1
Percentage Change in Sales = Sales(1) / Sales(2) - 1
<em>Strong economic Condition</em>
Sales = $1 Price x 1,200,000 units = $1,200,000
Variable Cost (VC) = $0.5 variable cost x 1,200,000 units = $600,000
Fixed cost (FC) = $500,000
EBIT = Sales - VC - FC
EBIT = $1,200,000 - $600,000 - $500,000
EBIT = $100,000
<em>Weak economic Condition</em>
Sales = $1 Price x 1,100,000 units = $1,100,000
Variable Cost (VC) = $0.5 variable cost x 1,100,000 units = $550,000
Fixed cost (FC) = $500,000
EBIT = Sales - VC - FC
EBIT = $1,100,000 - $550,000 - $500,000
EBIT = $50,000
Solving for DOL:
Percentage Change in EBIT = $100,000/50,000 - 1
Percentage Change in EBIT = 100%
Percentage Change in Sales = $1,200,000/1,100,000 - 1
Percentage Change in Sales = 9.09%
Now, using the above mentioned formula we can calculate DOL:
DOL = 100% / 9.09% - 1 = 11x
