Operating Leverage. You estimate that your cattle farm will generate $ 1 million of profits on sales of $ 4 million under normal economic conditions and that the degree of operating leverage is 8. What will profits be if sales turn out to be $ 3.5 million? What if they are $ 4.5 million?
22. Operating Leverage. A project has fixed costs of $ 1,000 per year, depreciation charges of $ 500 a year, revenue of $ 6,000 a year, and variable costs equal to two- thirds of revenues.
a. If sales increase by 10%, what will be the increase in pretax profits?
b. What is the degree of operating leverage of this project?
c. Confirm that the percentage change in profits equals DOL times the percentage change in sales.