15BP_b U.S. Steal has the following inc... [FREE SOLUTION]

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Foundations Of Financial Management

Stanley B. Block, Geoffrey A. Hirt, Bartley Danielsen

Business Studies

16th Edition 路 768 pages

ISBN: 9781259277160

Chapter 2: 15BP_b (page 149)

U.S. Steal has the following income statement data:
Units sold
Total variable costs
Fixed costs
Total costs
Total revenue
Operating income (Loss)
60,000
$120,000
$50,000
$170,000
$360,000
$190,000
80,000
160,000
50,000
210,000
480,000
270,000
b. Confirm that your answer to part a is correct by recomputing DOL using Formula 5-3. There may be a slight difference due to rounding.
$DOL = \frac{Q (P - VC)}{Q (P - VC) - FC}$
Q represents beginning units sold (all calculations should be done at this level). P can be found by dividing total revenue by units sold. VC can be found by dividing total variable costs by units sold.

Short Answer

Expert verified

The degree of operating leverage of the company is 1.26. It is confirmed that the DOL computed in part a is correct.

Step by step solution

Calculating the amount of P at 60,000 units sold

$\begin{array}{rcl} P & = & \frac{Total revenue at 60, 000 units}{Number of units} \\ = & \frac{$ 360, 000}{60, 000} \\ = & $ 6 \end{array}$

Calculate VC

$\begin{array}{rcl} VC & = & \frac{Total variable cost}{Number of units sold} \\ = & \frac{$ 120, 000}{60, 000} \\ = & 2 \end{array}$

Degree of operating leverage

$\begin{array}{rcl} DOL & = & \frac{Q (P - VC)}{(P - VC) - FC} \\ = & \frac{60, 000 ($ 6 - $ 2)}{60, 000 ($ 6 - $ 2) - $ 50, 000} \\ = & 1.26 \end{array}$

The degree of operating leverage by applying the given formula in question is 1.26.

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Lancaster corporation
Sales	\(246,000
Cost of goods sold	122,000
Gross profit	\)124,000
Fixed charges (other than interest)	27,500
Income before interest and taxes	\(96,500
Interest	21,800
Income before taxes	\)74,700
Taxes (35%)	26,145
Income after taxes	$48,555

Stud Clothier
Balance sheet 20X1
Assets		Liabilities and Equity
Cash	\)60,000	Account payable	\(220,000
Account receivable	240,000	Accrued taxes	30,000
Inventory	350,000	Bonds payable (long term)	150,000
Plant and equipment	410,000	Common stock	80,000
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Total assets	\)1,060,000	Total LIbilities and Equity	$1,060,000

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Short Answer

Step by step solution

Calculating the amount of P at 60,000 units sold

Calculate VC

Degree of operating leverage

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Units sold	Total variable costs	Fixed costs	Total costs	Total revenue	Operating income (Loss)
60,000	\(120,000	\)50,000	\(170,000	\)360,000	$190,000
80,000	160,000	50,000	210,000	480,000	270,000