Consider a business that has a variable cost per unit of $2, a sales price per unit of $4.50, and fixed operating costs of $5,000. The degree of operating leverage at 10,000 units produced and sold is closest to:
A) 0.80
B) 1.00
C) 1.25

Question

Quizplus · Accepted Answer

The degree of operating leverage (DOL) is calculated as: DOL = [Q(P-V)] / [Q(P-V) - F], where Q is the quantity sold, P is the price per unit, V is the variable cost per unit, and F is the fixed costs. Plugging in the given values: DOL = [10,000($4.50 - $2)] / [10,000($4.50 - $2) - $5,000] = $25,000 / $20,000 = 1.25.

Consider a Business That Has a Variable Cost Per Unit