Modern Artifacts can produce keepsakes that will be sold for $270 each. Nondepre

Question

Modern Artifacts can produce keepsakes that will be sold for $270 each. Nondepreciation fixed costs are $3,200 per year, and variable costs are $190 per unit. The initial investment of $9,600 will be depreciated straight-line over its useful life of 8 years to a final value of zero, and the discount rate is 16%.

a. What is the degree of operating leverage of Modern Artifacts when sales are $16,740? (Do not round intermediate calculations. Round your answer to 2 decimal places.) Degree of operating leverage

b. What is the degree of operating leverage when sales are $28,890? (Do not round intermediate calculations. Round your answer to 2 decimal places.) Degree of operating leverage

c. Why is operating leverage different at these two levels of sales? Degree of operating leverage is when profits are

Explanation / Answer

operating leverage= Contribution / net operating income a) per unit total number of units Selling price 270 16740 62 Less: variable cost 190 11780 Contribution 80 4960 Fixed cost    depriciation (9600/8) 1200    other fixed cost 3200 net operating income 560 Contribution margin 29.63% operating leverage= Contribution/ net operating income                                        = 4960 / 560                                         =8.86 b) per unit total number of units Selling price 270 28890 107 Less: variable cost 190 20330 Contribution 80 8560 Fixed cost    depriciation (9600/8) 1200    other fixed cost 3200 2.057692 net operating income 4160 Contribution margin 29.63% operating leverage= Contribution / net operating income                                         = 8560/4160                                         = 2.06 c) operating leverage is ifferent at these two levels , because the company has high fixe costs , which means that the company has high operating leverage , that is that the company would earn higher incremnetal profit once it has covere its fixe cost. Degree of operating leverage iswhen profit are sensitive to changes in sales if profits are more sensitive to sales the business has high operating leverage an vice versa

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