A project has fixed costs of $1,000 per year, depreciation charges of $500 a year, revenue of $6,000 a year, and variable costs equal to two-thirds of revenues.
a) If sales increase by 5 percent, what will be the increase in pretax profits?
b) What is the degree of operating leverage of this project?
c) Confirm that the percentage change in profits equals DOL times the percentage change in sales.
The solution is comprised of a step by step explanation of how to calculate the degree of operating leverage.