Question

You estimate that your cattle farm will generate $.40 million of profits on sales of $8 million under normal economic conditions and that the degree of operating leverage is 2.(Leave no cells blank - be certain to enter "0" wherever required. Do not round intermediate calculations. Enter your answers in millions rounded to 1 decimal place.)

a. What will profits be if sales turn out to be $3.3 million? Profit will to $ million.

b. What if they are $12.0 million? Profit will to $ million.

Answer 1

a.if sales turns out to be $3.3 million.

change in sales = ($3.3 m -$8.0m) / $8.0m *100

=>-58.75%%.

change in profit in percentage terms= change in sales *degree of operating leverage

=>-58.75%* 2

=>-117.50%.

=>-1.11750

so profits will be = old profit *(1+ change in profit)

=>$0.40 million *(1 + (-1.1750))

=>-$0.07 million (loss)..

b.if they are $12.0 million.

percentage change in sales = (12 - 8) / 8 *100

=>50%.

percentage change in profits will be = 50%*2 =>100% or 1.

so new profits will be = $0.40 million *(1+1)

=>$0.80 milliion.