Weis Products has fixed operating costs of $20 million and a variable cost ratio of 0.55. Weis has 4 million common shares outstanding and a marginal tax rate of 45%. What is Weis's degree of operating leverage at an expected sales level of $150 million?
A) 1.00
B) 1.74
C) 1.42
D) 1.32

Question

Quizplus · Accepted Answer

Degree of Operating Leverage (DOL) = (Contribution Margin / EBIT)

First, we need to calculate the contribution margin (CM) using the variable cost ratio:

Variable Cost = 0.55 * $150 million = $82.5 million
Fixed Cost = $20 million
Total Cost = $82.5 million + $20 million = $102.5 million
Revenue = $150 million

CM = Revenue - Total Cost = $150 million - $102.5 million = $47.5 million

Next, we need to calculate EBIT:

EBIT = CM - Fixed Costs = $47.5 million - $20 million = $27.5 million

Now we can calculate the DOL:

DOL = CM / EBIT = $47.5 million / $27.5 million = 1.73

However, we need to adjust for taxes by multiplying the DOL by (1 - Tax Rate):

DOL = 1.73 * (1 - 0.45) = 0.95 * 1.73 = 1.42

Therefore, the correct answer is C) 1.42.

Weis Products Has Fixed Operating Costs of $20 Million and a Variable