Question

The company incurs costs of $22.65 million regardless of the output level. It sells 6.42 million units of its product at the price of $8.79, and its variable costs per unit are $2.78. The company has $54 million of debt with an annual interest rate of 4.49%. What is the degree of operating leverage at the current level of sales? Round to two decimals

Answer 1

The degree of operating leverage at the current level of sales is computed as shown below:

= [ (Selling price per unit - variable cost per unit) x number of units ] / [ Selling price per unit x number of units - variable cost per unit x number of units - fixed cost ]

= [ ($ 8.79 - $ 2.78) x 6.42 million ] / [ $ 8.79 x 6.42 million - $ 2.78 x 6.42 million - $ 22.65 million ]

= $ 38.5842 million / $ 15.9342 million

= 2.42 Approximately

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