Modern Artifacts can produce keepsakes that will be sold for $30 each. Nondeprec

Question

Modern Artifacts can produce keepsakes that will be sold for $30 each. Nondepreciation fixed costs are $400 per year, and variable costs are $20 per unit. The initial investment of $1,200 will be depreciated straight-line over its useful life of 10 years to a final value of zero, and the discount rate is 8%.

a. What is the degree of operating leverage of Modern Artifacts when sales are $1,620? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

b. What is the degree of operating leverage when sales are $2,760? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

c. Why is operating leverage different at these two levels of sales?

Explanation / Answer

Dear Student Thank you for using Chegg Please find below the answer and please give thumbs up   Statementshowing Computations a b Paticulars                1,620.00                2,760.00 No of units = Sales/30                      54.00                      92.00 Sales                1,620.00                2,760.00 Variable cost = 20*No of units                1,080.00                1,840.00 Contribution = Sales - VC                    540.00                    920.00 Fixed costs                    400.00                    400.00 Depreciation = 1200/10                    120.00                    120.00 EBIT= Cont - FC - Dep                      20.00                    400.00 Degree of operating leverage = Cont/EBIT                      27.00                        2.30 c) It is because higher the sales lower would be the leverage as fixed cost would remain same irrespective of level of sales whereas contribution would increase with sales

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