You estimate that your cattle farm will generate $.20 million of profits on sale

Question

You estimate that your cattle farm will generate $.20 million of profits on sales of $4 million under normal economic conditions and that the degree of operating leverage is 5. (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 $3.2 million?

Profit will (increase/decrease) to $ million.

b. What if they are $4.8 million?

Profit will (increase/decrease) to $ million.

Explanation / Answer

a.Profits will be $.0 be if sales turn out to be $3.2 million. Profit will decrease by ($0.20) million.

degree of operating leverage = change in operating income/ change in sales

5 =( (EBIT1 - 0.20)/0.20 ) /(3.2-4)/4)

5 =( (EBIT1 - 0.20)/0.20 )

(EBIT1 - 0.20)/0.20 = -1

(EBIT1 - 0.20) = -0.2

EBIT 1 = 0

b.Profits will be $0.40 million if sales turn out to be $4.8 million. Profit will increase by $0.20 million.

5 =( (EBIT1 - 0.20)/0.20 ) /(4.84 -4)/4)

5 =( (EBIT1 - 0.20)/0.20 )

(EBIT1 - 0.20)/0.20 = 1

(EBIT1 - 0.20) = 0.2

EBIT 1 = 0.4

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