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The Degree of Operating Leverage

Grey Products has fixed operating costs of $380,000, variable operating costs of $16 per unit, and a selling price of $63.50
per unit. Please refer to the attached document for the required data.

A) Calculate the operating break even point in units.

B) Calculate the firm's EBIT at 9,000, 10,000, and 11,000 units, respectively.

C) With 10,000 units as a base, what are the percentage changes in units sold and EBIT as sales move from the base to the other sales levels used in part B?

D) Use the percentages computed in part c to determine the degree of operating leverage (DOL).

E) Use the formula for degree of operating leverage to determine the DOL at 10,000 units.

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Solution Preview

Please refer attached file for better clarity of formulas and tables in MS Excel. Expressions typed with the help of equation writer are missing here.

A) Calculate the operating breakeven point in units.
Price=P = $63.50 per unit
Variable cost =V=$16.00 per unit
Fixed Cost=F = $380,000.00
Breakeven point=F/(P-V) = 8,000 units

B) Calculate the firm's EBIT at 9,000, 10,000, and 11,000 units, respectively. ...

Solution Summary

This solution provides the required step by step methodology needed to determine the break even point and degree of operating leverage for the given scenario. An Excel attachment file containing the solution is also provided. By clicking directly onto the cells, it is easier to understand the exact calculations which have been conducted.

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