The following operating data was reported by Acer Sports for the month of October, during which 1,000 rackets and 4,000 packs of racquetballs were produced and sold: Acer Sports has a loan agreement with its bank that enables the company to borrow as needed for working capital purposes. However, the agreement requires that Acer's degree of operating leverage not exceed 4.0. Acer's income tax rate is 30%.Answer the following questions. Use three decimal places for DOL amounts.
a. Calculate the degree of operating leverage for Acer Sports for October. Explain the lever effect as it relates to the DOL.
b. The management team estimates that it will experience an 8% decline in sales volume for the months of November and December. Using the answer to part a, determine the expected operating income if the sales decline occurs in November.
c. Explain to the management team the effects of the sales decline. Will the company be in violation of the loan agreement?
d. What actions might management take to improve its DOL?

Question

The following operating data was reported by Acer Sports for the month of October, during which 1,000 rackets and 4,000 packs of racquetballs were produced and sold:  Acer Sports has a loan agreement with its bank that enables the company to borrow as needed for working capital purposes. However, the agreement requires that Acer's degree of operating leverage not exceed 4.0. Acer's income tax rate is 30%.Answer the following questions. Use three decimal places for DOL amounts. 
a. Calculate the degree of operating leverage for Acer Sports for October. Explain the lever effect as it relates to the DOL.
b. The management team estimates that it will experience an 8% decline in sales volume for the months of November and December. Using the answer to part a, determine the expected operating income if the sales decline occurs in November.
c. Explain to the management team the effects of the sales decline. Will the company be in violation of the loan agreement?
d. What actions might management take to improve its DOL?

Quizplus · Accepted Answer

The Answer of The following operating data was reported by Acer Sports for the month of October, during which 1,000 rackets and 4,000 packs of racquetballs were produced and sold:  Acer Sports has a loan agreement with its bank that enables the company to borrow as needed for working capital purposes. However, the agreement requires that Acer's degree of operating leverage not exceed 4.0. Acer's income tax rate is 30%.Answer the following questions. Use three decimal places for DOL amounts. 
a. Calculate the degree of operating leverage for Acer Sports for October. Explain the lever effect as it relates to the DOL.
b. The management team estimates that it will experience an 8% decline in sales volume for the months of November and December. Using the answer to part a, determine the expected operating income if the sales decline occurs in November.
c. Explain to the management team the effects of the sales decline. Will the company be in violation of the loan agreement?
d. What actions might management take to improve its DOL?

The Following Operating Data Was Reported by Acer Sports for the Month