Question

# You estimate that your cattle farm will generate \$0.15 million of profits on sales of \$3...

You estimate that your cattle farm will generate \$0.15 million of profits on sales of \$3 million under normal economic conditions and that the degree of operating leverage is 2. a. What will profits be if sales turn out to be \$1.5 million? (Leave no cells blank - be certain to enter "0" wherever required. Do not round intermediate calculations. Enter your answers in millions.) b. What

will profits be if sales turn out to be \$4.5 million? (Do not round intermediate calculations. Enter your answers in millions rounded to 1 decimal place.)

 DOL=% change in profits/% change in sales ie. A measure of change in profits, given the change in sales 2.a. Profits ,be if sales turn out to be \$1.5 million ie. Decrease by 50%----\$ 1.5 mln. Is 50% of \$ 3 mln. Given the DOL =2 Decrease in sales =50% DOL=2 So, decrease in profits will be 50%*2= 100% \$ Decrease in profits=0.15*100%=0.15 Profits will be 0.15-0.15= \$ 0   mlns. 2.b.Profits , if sales turn out to be \$4.5 million ie. Increase by 50%----\$ 4.5 mln. Is 150% of \$ 3 mln. Given the DOL =2 Increase in sales =50% DOL=2 So, Increase in profits will be 50%*2= 100% \$ Increase in profits=0.15*100%=0.15 Profits will be 0.15+0.15= \$ 0.3 mlns.

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