Compute DOL for U.S. Steel I am having trouble trying to figure out how to do th

Question

Compute DOL for U.S. Steel

I am having trouble trying to figure out how to do this problem....I have looked around the site but the answers don't really show the steps I need to figure out this problem.

a.) Compute DOL based on the following formula

DOL=%change in operating income/% change in units sold

b.) confirm that your answer is correct by recomputing DOL using this formula...

DOL=Q(P-VC)/Q(P-VC)-FC

Units Sold Total Variable Cost 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

Explanation / Answer

a) % change in Operating income = (270000-190000)/190000 = 0.42105263

% change in unit sold = (80000-60000)/60000 = 0.333333333

DOL = 0.42105263/0.333333333 = 1.2631

b) NOW,

DOL = Q*(P-VC)/(Q*(P-VC)-FC)

Price = Revenue/unit sold = 480,000/80,000 = 360,000/60,000 = $6 per unit

VC = total VC/unit sold = 160,000/80,000 = 120,000/60,000 = $2 per unit

P-VC =$4

FC = 50,000

DOL = Q4/(4Q-50000)

Q = 60,000

DOL = 4*60,000/(4*60000-50000) = 1.2631

DOL is same for both,

Hence proved.

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