Southwestern College is planning to hold a fund raising banquet at one of the local country clubs. It has two options for the banquet:
OPTION 1: Crestview Country Club
$\quad $$\quad $$\quad $a. Fixed rental cost of $1,000
$\quad $$\quad $$\quad $b. $12 per person for food

OPTION 2: Tallgrass Country Club
$\quad $$\quad $$\quad $$\quad $a. Fixed rental cost of $3,000
$\quad $$\quad $$\quad $$\quad $b. A caterer who charges $8.00 per person for food

Southwestern College has budgeted $1,800 for administrative and marketing expenses. It plans to hire a band which will cost another $800. Tickets are expected to be $30 per person. Local business supporters will donate any other items required for the event.
-What is the degree of operating leverage for both options if 600 people attend?

Question

Southwestern College is planning to hold a fund raising banquet at one of the local country clubs. It has two options for the banquet:
OPTION 1: Crestview Country Club
$\quad $$\quad $$\quad $a. Fixed rental cost of $1,000
$\quad $$\quad $$\quad $b. $12 per person for food

OPTION 2: Tallgrass Country Club
$\quad $$\quad $$\quad $$\quad $a. Fixed rental cost of $3,000
$\quad $$\quad $$\quad $$\quad $b. A caterer who charges $8.00 per person for food

Southwestern College has budgeted $1,800 for administrative and marketing expenses. It plans to hire a band which will cost another $800. Tickets are expected to be $30 per person. Local business supporters will donate any other items required for the event.
-What is the degree of operating leverage for both options if 600 people attend?

Quizplus · Accepted Answer

To calculate degree of operating leverage (DOL), we need to use the following formula: 
DOL = (Sales - Variable Costs) / (Sales - Variable Costs - Fixed Costs)

For Option 1 (Crestview Country Club): 
· Sales = 600 x $30 = $18,000 
· Variable costs = 600 x $12 = $7,200 
· Fixed costs = $1,000 + $1,800 + $800 = $3,600 
· DOL = ($18,000 - $7,200) / ($18,000 - $7,200 - $3,600) = 1.5

For Option 2 (Tallgrass Country Club): 
· Sales = 600 x $30 = $18,000 
· Variable costs = 600 x $8 = $4,800 
· Fixed costs = $3,000 + $1,800 + $800 = $5,600 
· DOL = ($18,000 - $4,800) / ($18,000 - $4,800 - $5,600) = 1.74

Therefore, the best choice would be Option 2 (Tallgrass Country Club) as it has a higher degree of operating leverage and will result in higher profits.

Southwestern College Is Planning to Hold a Fund Raising Banquet \quad

Southwestern College Is Planning to Hold a Fund Raising Banquet $\quad$