Stromburg Corporation makes surveillance equipment for intelligence organizations.Its sales are $75,000,000.Fixed operating costs,including research and development,are $40,000,000,while variable costs amount to 30% of sales.Stromburg plans an expansion which will generate additional fixed costs of $15,000,000,decrease variable costs to 25% of sales,and also permit sales to increase to $100,000,000.What is Stromburg's DOL at the new projected sales level?

Question

Quizplus · Accepted Answer

Degree of Operating Leverage (DOL) is calculated using the formula: 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 cost. In this scenario, we use sales and costs instead of per unit measures. The formula simplifies to DOL = (Sales - Variable Costs) / (Sales - Variable Costs - Fixed Costs). After the expansion, Sales = $100,000,000, Variable Costs = 25% of Sales = $25,000,000, and Fixed Costs = $40,000,000 + $15,000,000 = $55,000,000. Thus, DOL = ($100,000,000 - $25,000,000) / ($100,000,000 - $25,000,000 - $55,000,000) = $75,000,000 / $20,000,000 = 3.75.

Stromburg Corporation Makes Surveillance Equipment for Intelligence Organizations