Question

You estimate that your cattle farm will generate $0.10 million of profits on sales of $2 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 $1.6 million

Answer 1

Answer:

Profit would decrease to $0.0 million

Explanation:

The degree of operating leverage is the change in profit as a result of the change in sales revenue

DOL=% change in profit/% change in sales

DOL=5

% change in profit=unknown

% change in sales=($1.6m-$2.0m)/$2.0m

% change in sales=-20%

5=% change in profit/-20%

% change in profit=5*-20%

% change in profit=-100%

the new amount of profit=current amount of profit*(1-% change in profit)

current amount of profit=$0.10 million

the new amount of profit=$0.10 million*(1-100%)

the new amount of profit=$0.0 million