Hedge Fun is a landscaping firm that specializes in topiary.It contracts with the owners of 140 local homes and provides its service at an annual fee of $1,300.Its average variable cost is $900,and its annual fixed cost is $28,000.What is the degree of operating leverage?
A) 0.5.
B) 1.
C) 1.5.
D) 2.
E) 2.5.

Question

Quizplus · Accepted Answer

Degree of operating leverage (DOL) = % change in operating profit / % change in sales.

To calculate the DOL, we need to first determine the operating profit, which can be calculated as follows:

Operating profit = Total revenue - Total variable costs - Fixed costs

= ($1,300 x 140) - ($900 x 140) - $28,000

= $98,000 - $126,000

= -$28,000 (i.e., the company is currently operating at a loss)

Once we have the operating profit, we can calculate the DOL as:

DOL = % change in operating profit / % change in sales

= ($98,000 - $28,000) / $127,400

= 0.546

Therefore, the closest choice is D, 2.

Hedge Fun Is a Landscaping Firm That Specializes in Topiary