Question

U.S. Steal has the following income statement data:

Units Sold	Total Variable Costs			Fixed Costs			Total Costs			Total Revenue			Operating Income (Loss)
105,000	$	210,000		$	80,000		$	290,000		$	420,000		$	130,000
125,000		250,000			80,000			330,000			500,000			170,000

The top row of the table has the beginning values and the bottom row of the table has the ending values.

a. Compute the degree of operating leverage (DOL) based on the formula below. (Do not round intermediate calculations. Round your final answer to 2 decimal places.)

DOL	=	Percent change in operating income
		Percent change in units sold

Degree of operating leverage

b. Recompute DOL using the formula given below. There may be a slight difference due to rounding. (Do not round intermediate calculations. Round your final answer to 2 decimal places.)

DOL	=	Q(P − VC)
		Q(P − VC) − FC

Q represents beginning units sold (all calculations should be done at this level).
P can be found by dividing total revenue by units sold.
VC can be found by dividing total variable costs by units sold.

Degree of operating leverage

Answer 1

DOL	% change in operating income/ percent change in units sold	30.77%/19.05%	1.62
% change in operating income	(170000-130000)/130000	30.77%
% change in units sold	(125000-105000)/105000	19.05%
	beginning	Year end
total evenue	420000	500000
quantity	105000	125000
selling price per unit	4	4
total variable cost	210000	250000
quantity	105000	125000
variable cost per unit	2	2
fixed cost	80000	80000
DOL	(125000*(4-2)) / (125000*(4-2)-80000)	1.470588