you estimate that your cattle farm will generate $30 million of profits on sales

Question

you estimate that your cattle farm will generate $30 million of profits on sales of $6 million under normal economic conditions and that the degree of operating leverage is 4. (Leave no cells blank-be certain to enter "0" wherever required. Do not round intermediate calculations. Enter your answers in millions rounded to 1 decimal place)

a. what will profits be if sales turn out to be $4.5 million?

profit will (increase or decrease) to $__________million

b. What if they are $7.5 million?

profit will (increase or decrease) to $ __________million

Explanation / Answer

The formula to calculate Operating leverage is % Change in Profit/ %Change in Sale So in the present case the opearting leverage is 4.. So

a. If Sale turn out to be 4.5 million $ then, Profit is 4 = Sale/25%

% Change in Proft is 100%

So Profit is 0 in this case

b. IF Sale turn out to be 7.5 million $ then , Profit 4 = Sale/25%

% Change in Proft is 100%

So Profit is 60 million $

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