Question

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.)

Answer 1

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.