Question

You estimate that your cattle farm will generate $0.20 million of profits on sales of $4 million under normal economic conditions and that the degree of operating leverage is 5. a. What will profits be if sales turn out to be $3.2 million? (Leave no cells blank - be certain to enter "0" wherever required. Do not round intermediate calculations. Enter your answers in millions.)

Answer 1

Answer:

$0

Explanation:

Profits will be $0 if sales turn out to be $3.2 million.

Profit will decrease by ($0.20) million.

Degree of operating leverage = change in operating income ÷ change in sales

$5=\frac{[\frac{EBIT1-0.20}{0.20}]}{\frac{3.2-4}{4} }$

(EBIT1 - 0.20) ÷ 0.20 = -1

(EBIT1 - 0.20) = -0.2

EBIT 1 = 0

Therefore,

Profits = $0